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MARINE INSURANCE 



ITS PRINCIPLES AND PRACTICE 




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MAEINE INSUEANCE 



ITS PRINCIPLES 
AND PRACTICE 



BY 

WILLIAM D. WINTER, LL. B.,ib6S- 

SPECIAL LECTURER ON MARINE INSURANCE, NEW YORK UNIVERSITY. 

THIRD VICE-PRESIDENT ATLANTIC MUTUAL INSXntANCE 

COMPANY OF NEW YORK 



First Edition 
Third Impression 



McGRAW-HILL BOOK COMPANY. Inc. 

NEW YORK: 239 WEST 39TH STREET 
LONDON: 6 & 8 BOUVERIE ST., E. C. 4 

1919 






coptright, 191 9| bt the 
McGraw-Hill Book Comi^ant, Inc. 



TSX MAFXiX PXnSB TOXK PJl 






PREFACE 

The past four years have witnessed many changes in the com- 
mercial Ufe of the United States, not the least of which has been 
the renaissance of the American Merchant Marine, and with it a 
marvellous growth in our overseas trade. Shipping, banking 
and insurance, the trinity of foreign trade, have taken a new 
f/) lease of life, and American commercial activities are reaching 

^ into fields hitherto untouched by purely American enterprise. 

(j) This natiu-ally has caused a demand for knowledge concerning 

•^ these three subjects. New York University, in the foreign 

ri trade courses offered in the Wall Street Division of its School 

Q of Commerce, Accounts and Finance, has met this demand. It 

has been my privilege during the past year to lecture before the 
University on the subject of Marine Insurance. The attendance 
at these lectures has indicated that a real need exists for non- 
technical information in regard to this important, but little 
known, branch of insurance science. 

It therefore seemed fitting that the matter contained in the 
lectures should be rewritten and published in book form so that 
it might be available to students, and to shipping men, bankers, 
merchants and insurance men who require a general knowledge 
of marine insurance. It is the purpose of this treatise to present 
the subject in a thorough yet simple form, so that the principles 
and practice of this necessary element in our over-seas commerce 
may become more generally known. 

I wish to avail myself of this opportunity of expressing my 
gratitude to many who have taken a helpful interest in the 
prepjgiration of this work, making special mention of Mr. Her- 
bert F. Eggert and Professor A. Wellington Taylor, for their 
aid in the revision of the manuscript. 

William D. Winter. 

New York City, 
February 1, 1919. 



417693 



CONTENTS 

Pagb 

Preface v 

Historical Introduction 1 

Origin of Marine Insurance Doubtful — Ancient Commercial Activ- 
ity — Early Forms of Insurance — General Average — Bottomry 
Bonds — Forms of Bottomry Bonds Distinguished — Grecian Com- 
merce and the First Insurance Exchange — The Carthaginians, 
Phoenicians and Romans — Commerce in the Middle Ages — The 
Hanseatic League — The First Sea Codes — Early Insurance Rules — 
Modem Marine Insurance — First Use of Word Insurance — The Age 
of Discovery — Rules to Prevent Misuse of Insurance — Insurance 
Well Established in Fifteenth Century— The "Guidon de la Mer" 
— Marine Insurance in England — The Hansa Merchants and the 
Steelyard — The Lombards in England — ^Lombard Street — Depar- 
ture of Hansa Merchants and Lombards — Influence of Foreign 
Merchants — First English Marine Insurance Statute — Individual 
Underwriters — ^Lloyd's Coffee House and Lloyd's News — A Meet- 
ing Place of Underwriters — Insurance Companies Organized — 
The Monopoly — Growth of Marine Insurance — ^Lloyd's — Standard 
Policy Adopted — Increase of Individual Underwriters — Efforts 
to Incorporate New Companies — ^Lloyd's Reorganized — The 
Monopoly Repealed — New Companies — Marine Insurance Law — 
Lord Mansfield — The Marine Insurance Act, 1906 — ^Early Under- 
writing in the United States — First American Insurance Corpora- 
tion — Corporation Development — Competition Among Companies 
and Failures — The Clipper Ship and Insurance Frauds — Marine 
Insurance Revives — ^The Civil War — Foreign Companies Enter 
the United States — Decline of American Merchant Marine — 
The Marine Insurance Market Broadens — ^little American Capital 
Invested in Marine Companies — Steady Growth of Marine In- 
surance — The World War and New American Companies — The 
Future of Marine Insurance in the United States. 

CHAPTER 1 

Physical Geography in Its Relation to Marine Insxtrance 29 

Effect of Natural Conditions on Trade Routes — Water Routes — 
Natural Law Discovered — Ocean Navigation — Aids to Naviga- 
tion — Effect of the Oceans on Climate — Ocean Distances are 

vu 



viii . CONTENTS 

Paqb 

Great — The Physical Force of Nature — The Wind and Storms — 
Eflfect of Wind on Ocean Routes — Wave Force — The Power of 
Waves — Seaquakes and Tidal Waves — ^Tides — Effect of Tides 
on Harbor Development — Ocean Currents — Calms — Fog — Ice — 
Darkness — Harbors and Their Development — Types of Harbors — 
Drowned Valley Harbors — Barrier Beach Harbors — River Harbors 
— Coral Reef Harbors — Crater Harbors — ^Artificial Harbors — 
Open Roadsteads — ^Tidal Harbors. 

CHAPTER 2 

Commercial Geography in Its Relation to Marine Insurance. 

Commercial Documents 44 

The Processes of Trade — Commerce is the Exchange of Products — 
The Demand for Goods — The Opening of New Trade Routes — 
Primitive Barter — Types of Trade — The Use of Symbols and the 
Bill of Exchange — Marine Insurance Essential to Overseas Trade 
— Commercial Documents — The Invoice — Cost Sales. F. O. B. 
and F. A. S. — Cost and Freight Sales (C & F) — Cost, Insurance and 
Freight Sales (C. I. F.) — Invoice Determines Relation of Buyer 
and Seller— The Charter Party— Forms of Charters— The Bill of 
Lading — Bill of Lading a Contract of Carriage — ^Liability of Carrier 
Determined by Bill of Lading — The Manifest— The Marine In- 
surance Policy or Certificate — The Symbols of Ownership — The 
Draft or Bill of Exchange — Method of Collection of Draft — 
Trading in Bills of Exchange — Letters of Credit — The Balance of 
Trade — Goods the Basis of Exchange. 

CHAPTER 3 

Ships and Shipbuilding 61 

A Vessel the Basis of all Marine Insurance — Mediums Used in 
Construction of Vessels — ^Wooden Ships. Difficulties in Con- 
struction — Green Wood and Its Effect — The Fastenings of Wooden 
Vessels — Composite Ships — Steel Vessels — The Marine Engine — 
Liners and Tramps — ^Longitudinal Framing — Bulk Cargo Carriers 
— The Self-trimming Vessel — Concrete Ships — ^Lake Vessels — 
River and Harbor Craft — ^Types of Marine Engines — Why Does a 
Vessel Float? — Displacement — Displacement Curve — When Will a 
Vessel Float? — Buoyancy — Free-board and Load Lines — The 
PlimsoU Mark — The Advantages of a Load-line Law — Stability. 
The Centers of Buoyancy and Gravity — Why a Vessel Rights After 
Rolling — The Law of Inertia — Shifted Cargoes — The Meta-center. 
Stiff and Tender Vessels — The Control of Meta-center Height — 
Loading Problems. 



CONTENTS ix 

CHAPTER 4 

Page 

The Ship as a Cargo Carrier 77 

Stresses and Strains — The Strain of Unequal Weights — Strain 
of Lateral Pressure and of Wave Action — Panting Strains — Other 
Strains — Vessels in Ballast — The Classification Societies — What a 
"Class" Signifies — ^Lloyd's Register — Rival Organizations — 
Necessity for Understanding Classification Society Codes — The 
American Record — Underwriters' Surveyors — Underwriters* 
Organizations — Underwriters' Boards and Loss Agents — Salvage 
Associations — Maps, Charts and Port Books — The Tools of the 
Underwriter — Factors in Underwriting — Nationality — Owners, 
Managers and Masters — Structural Characteristics of Ship and Its 
Physical Condition — Other Considerations — The Measurement 
of Ships — The Measurement of Cargo Capacity — Cargoes and 
Shipping Packages — The Moral Hazard. 

CHAPTER 5 

The Contract op Marine Insurance. Rules for Construction. . 93 
Definition of Marine Insurance — Not a Perfect Contract of Indem- 
nity — Only Fortuitous Losses Covered — NegUgence Should Not be 
Covered by Policy — The Effect of Insurance — The Law of Averages. 
Competition — Modem Policy Broad in Its Protection — Good 
Faith — Elements of a Contract — Corporate and Individual Under- 
writers — An Insurable Interest Necessary — The Premium a Valid 
Consideration — The Minds of the Contracting Parties Must Meet 
— A Legal Purpose Necessary — Direct and Indirect Placing of In- 
surance — Brokers — The Insurance Application — Binders and 
Inquiries — The Policy — Rules for Construction — Usage — Mercan- 
tile Customs — Printed, Written and Stamped Words — The 
Intention of the Parties. Technical Words — Extrinsic Evidence — 
Does the Application Control the Policy? — The Law of the Place — 
The Cancellation and Modification of Contracts — The Assignment 
of Policies. Certificates — Clarity Essential in the Writing of 
Policies. 

CHAPTER 6 

The Policy. Assurer and Assured 108 

Types of Policies — Form of Policy — British Form of Policy — The 
Assurer — The Assured — Insurable Interest Must be an Actual One 
— ^Extent of the Insurable Interest — Persons Who Have Insurable 
Interests — "For Accoimt of" — Attachment of Policy — Descrip- 
tion of Insurable Interest Should be Definite — An Insurable 
Interest Must Exist — Whom It May Concern — "Whom It May 
Concern" is not All Inclusive — "Trading With the Enemy" — The 
Payee of Loss — ^The Insurance Certificate Transfers the Payment 



X CONTENTS 

Pagb 

of Loss — ^Loss May be Made Payable in Foreign Countries — ^Loss 
Orders — Open or Floating Policies — Blanket Policies — Advantages 
of Blanket Policies — Transit Floaters. 

CHAPTER 7 

The Policy (Continued). The Termini 125 

Lost or Not Lost — "Lost or Not Lost" a Necessary Condition — 
The Termini — The Subject Matter of Insurance — Goods Presumed 
to be Laden Under Deck — Some Kinds of Property Should be Spe- 
cifically Mentioned — The Vessel and Its Master — The Attach- 
ment of the Risk — Date of Attachment — The Time of Attachment 
— Insured Until Safely Landed — Warehouse to Warehouse Clause 
— At and From — Attachment of Cargo Insurance — Risk After Dis- 
charge from Vessel — Attachment of Hull Risks on Time — Attach- 
ment of Voyage Risks on Hull — Policy May Terminate by Breach of 
Contract — The Doctrine of "No Deviation" — The Conduct of the 
Voyage — When Does Deviation Occur? — The Valuation — Deter- 
mination of Value — Valued Policies in Marine Insurance Justified 
— The Basis of Valuation — Hull Values. 

• CHAPTER 8 

The Policy (Continued). The "Perils" Clause 140 

Perils insured Against — A Formidable List of Calamities — Doc- 
trine of Proximate Cause — ^Losses Which are Not Covered by the 
Policy — ^Losses Due to Fraud or Misconduct — Perils of the Sea — 
Enumeration of Perils of the Sea — Unavoidable Accident a Peril 
of the Sea — Other Perils of the Sea — Fire — Fire Protection — 
Jettison — Barratry — ^Lawless Acts and War Perils — Theft and 
Pilferage — Pirates and Rovers — War Perils — Men-of-war — 
Enemies — ^Letters of Mart and Countermart — Reprisals — Takings 
at Sea. Arrests — Restraints and Detainments — Kings, Prices 
or People— All Other Perils— The "Free of Capture" Clause- 
Strikers and Locked Out Workmen Clause — Modif3dng Clauses. 

CHAPTER 9 

The Policy (Continued). Sue and Labor Clause 155 

Sue and Labor Clause — Purpose of Sue and Labor Clause — Applies 
to Specific Property Insured — Assured Must Enforce His Rights 
Against Third Parties — The Premium — Competition Affects Rates 
— Premium Charged on Amount Insured — Rates of Premiums 
Used in Great Britain — Return Premium — ^Proofs and Payment 
of Loss — Proofs of Interest — Adjustment of Loss — Average Clauses. 
The Franchise — Deductible Average Clauses — Purpose of Aver- 
age Clauses — Average Clauses Reduce Cost of Insurance — Double 



CONTENTS xi 

Page 

Insurance — Theory of Double Insurance DiflFerent in Great Britain 
—Under Insurance — Insurance on Same Property Covering 
Different Risks — Carrier's LiabiKty — Illicit or Prohibited Trade — 
Abandonment — Purpose of Abandonment Clause — ^LiabiUty for 
Expenses — ^Liberty to Deviate in Event of Blockade — The Attesta- 
tion Clause — Memorandiun Clause — Underwriter Retains Pre- 
mium on Risk Unwittingly Insured After Arrival — R^umd. 

CHAPTER 10 

The Memorandum Clause. Implied and Expressed Warranties. 

Representation and Concealment 170 

All Goods Not Equally Susceptible to Damage — A Uniform Rate 
of Premium Desirable — The Memorandum Clause — General Aver- 
age Introduced into Marine Policy — Excepted Risks — The Separa- 
tion of Damaged Goods — Insurance Does Not Restore Property — 
Implied Warranty of Legal Conduct — Seaworthiness — Tests of 
Seaworthiness — No Fixed Standard of Seaworthiness — Seaworthi- 
ness Refers to Inception of Risk — Implied Warranty of Seaworthi- 
ness not Applicable to Hull Time Risks — The Waiver of Warranty 
of Seaworthiness — Implied Warranty of Seaworthiness Refers to 
Vessel, Not to Cargo — Proof of Breach of Warranty of Seaworthi- 
ness — Implied Warranty of Prompt Attachment of Risk — Delay 
Must be Unreasonable to Void Contract — Other Implied Warranties 
— Breach of Warranty May be Excused — Expressed Warranties 
— Warranties and Stipulations — Expresses Warranties Usually 
Relate to Material Conditions — Representation, Misrepresen- 
tation and Concealment — The Avoidance of Contracts — Fraud — 
What Must be Disclosed — The Effect of a Representation — Certain 
Facts Need Not be Disclosed — What a Representation Implies — 
Fraud. 

CHAPTER 11 

Cargo Insurance as an Underwriting Problem 186 

Basic Form of Policy Necessary — Cargo, Hull and Freight In- 
surance — General and Full Cargoes — Under and on Deck Cargoes 
—A General Knowledge of All Commodities Essential — Marine 
Insurance Conforms to Trade Customs — Methods of Shipment 
CJontroUed by Physical Environment — Knowledge of Trade 
Customs Important — Racial Characteristics Affect Marine In- 
surance — Sale of Goods at Port of Refuge — Effect of Vessel Types 
on Cargo Insurance — Vessel Speed an Element in Cargo Insurance 
— Structural Design in Its Relation to Cargo — Natural Forces as 
Related to Cargo Insurance — Optional Routes — Other Elements 
in Cargo Insurance — Average Conditions — Free of Particular 
Average — American and English Average Clauses Contrasted — 



xii CONTENTS 

Page 

The Effect of the F. P. A. E. C. Clause— F. P. A. E. C. Clause 
Illogical — ^Amended F. P. A. E. C. Forms — Stranding and Sinking 
— Burning and Collision — Other Casualties — Duration of Risk — 
Rate of Premium Based on Ordinary Transit — Cargo Clauses are 
Numberless. 

CHAPTER 12 

Specific Cargo Risks 201 

Full Cargo Business — A Seasonal Business — Congestion Hazard — 
Overloading of Vessels — Unfit Vessels Used to Carry Full Cargoes 
— Fire Hazard — Classes of Cargo — Products of Agriculture — Sweat 
Damage. Skimmings Clause — Raw Cotton — Schedule Rating — 
Grain Cargoes — Standard Clauses — Hard and Soft Grains — Vege- 
table Fibers — Raw Sugar — Fruits and Vegetables — Products of 
Animals — Canned and Bottled Goods. Dairy Products — Re- 
frigerated Goods — Dressed Meats — ^livestock — Hides and Skins — 
Raw Silk — Products of the Forest — Wood Cargoes — Products of 
the Mines — Coal and Ore — Products of Manufacturing — Diver- 
sity of Risk — Machinery — Burlaps and Bags. Fire Hazard — ^Leak- 
age and Breakage— Common Carriers' Insurance— Common 
Carriers' Liability — Parcel Post and Registered Mail Insurance — 
Securities and Currency. 

CHAPTER 13 

Hull Insurance 219 

Classes of Hull Insurance — Single Vessel and Fleet Insurance — 
Single Vessel Risks — Fleet Insurance — Moral Hazard — The Value 
of a Vessel — Valuation Should be Reasonable — Trading Warranties 
— Institute Warranties — ^Loading Warranties — Purpose of Warran- 
ties — ^Average Clauses — Three Percent Average Clause — Separate 
Valuations— Thirds Off— Modified "Thirds Off" Clauses— Ma- 
chinery Claims — Collision Liability — ^Legal Expenses in Collision 
Cases — Club Insurance — Protection and Indemnity Clause — 
Cancellation and Lay-up Return Premiums — "And Arrival" — 
Insurance — Port Risk Insurance. 

CHAPTER 14 

Special Policy Forms for the Insurance of Hulls 234 

Special Hull Forms — Work of the Hull Associations — Basis of 
All Policies the Same — Rates of Premium — The A. H. U. A. 
(1917 Form) — P. P. I. and F. I. A. Interests — Purpose of the Dis- 
bursements Warranty — Breach of Warranty with Respect to In- 
nocent Parties — Average Clause — Sale or Transfer of Ownership — 
Contributory Values — Effect of Breach of Cargo and Trade War- 
ranties — ^Lake Time Clauses — Restrictiens as to Navigation — 



CONTENTS xiii 

Page 

Extension of Navigation Limits — Winter Mooring Clause — 
Deductible Average Clause — ^Lay-up Clause. Change of Interest — 
Wooden Sailing Vessels — Wooden Steamers — ^The Internal Com- 
bustion Engine — ^The Auxiliary Sailing Vessel — Defects in Motive 
Power — A. H. U. A. Auxiliary Sailing Vessel Form — The Future 
of Auxiliary Vessels — Builder's Risks — Special Hazards Insured 
Against — Risks After Launching — Underwriter Guarantees In- 
tegrity of Material — Special Clauses and Warranties — Return 
Premiums — Fertile Field for Insurance. 



CHAPTER 15 

Freight Insurance 251 

Freight Insurance a Difficult Subject — Meaning of Freight in 
Marine Insurance — Vessels Built to Earn Freight — When is Freight 
Earned? — Freight "Pro-rata Itineris Peracti" — Prepaid and Guar- 
anteed Freight — Prepaid Freight Wrong in Principle — Interesting 
Underwriting Problems — Charter Parties — Charter Money — Bill 
of Lading Freight — Delivery of Cargo in Specie — Collectible 
Freight or Freight Contingency — Various Freight Interests in a 
Single Venture — Freight a Contingent Interest. Dead Freight — 
When Does Insurable Interest Commence? — Future Freights — 
Anticipated Freight — On Board or Not on Board — Chartered or as 
if Chartered — Termination of Risk — ^Amount Insured — Duty 
Insurance — Premium is Due Even if Duty Not Paid. 



CHAPTER 16 

War Insurance 266 

War Insurance an Important Feature — ^little Knowledge of War 
Insurance — A Great War Thought to be Impossible — Perils Judged 
by International Law — Principles of War and Marine Insurance 
the Same — Perils Insured Against — The Declaration of London — 
Blockade in Time of War — Contraband of War — Absolute Con- 
traband — Carriage of Contraband Cause for Condemnation — Un- 
neutral Service — Destruction of Neutral Prizes — Transfer of 
Vessels. Convoy — Right of Search — International Law Not 
Observed — Doctrine of Ultimate Destination. Preemption — Un- 
foreseen Perils — Neutrality Warranties — "Free of British Cap- 
ture" Clauses — ^Trading With the Enemy — Licenses — War and 
Marine Risks Separately Insured^Doubtful Losses — Inter- 
mediate Liabilities. Explosion Hazard — New War Devices — 
Submarines and Commerce Raiders — New and Unusual Hazards — 
Airplanes — Government War Bureaus. 



xiv CONTENTS 

CHAPTER 17 

Paqk 

Reinsurance 281 

The Destruction of Large Values — Reinsurance — The Distribution 
of Risks — Growth of Reinsurance — ^Jumbo lines — Necessity for 
Large Limits — Retained Lines — Purpose of Reinsurance — Rein- 
surance Not Different in Principle — Special and Floating Rein- 
surance Contracts — Reinsurer Bound by Acts of Reassured — 
Limitation of Liability — Share or Participating Reinsurance — 
Excess Reinsurance — Effect of Determination of Excess Amount 
— Division of Interest — Complications at Transhipping Points — 
Prior Losses Under Excess Policies — Excess Loss Reinsurance — 
Speculative Insurance — Shore Reinsurance — Co-insurance — 
Special Reinsurance Risks. Flat Reinsurance — Reinsurance Pools 
— Reinsurance Subject to Original Conditions — Reinsurance at 
Original Rates — Market Conditions — Arbitrage — Reinsurance of 
Unterminated Risks — Reinsurance of Overdue Vessels and Vessels 
in Disaster — Reinsurance Bordereau. Concurrent Reinsurance — 
Foreign and Domestic Reinsurance — Original Assured Has no Claim 
on Reinsurance. 

CHAPTER 18 

Losses. Introduction. General Average 297 

Losses Beneficial to Marine Insurance — The Conduct of Loss 
Matters Important — Insurance Funds Must be Conserved — ^Loss 
Adjusting a Profession — Specialization in Loss Adjusting — 
General Average — No Reasonable Substitute for General Average 
Yet Found — Definition of General Average — The General Average 
Adjuster — ^Laws of General Average Not Uniform — Elements 
Necessary to Valid General Average — The Peril and the Sacrifice — 
The Preservation of Part of the Venture — What is a Voluntary Sac- 
rifice? — The General Average Adjustment — Contributory Value of 
Hull — Freight Contribution — Contributory Value of Cargo — 
General Average Cases are Often Complicated — Statement of Both 
General and Particular Average — ^York-Antwerp Rules — Provi- 
sions for York- Antwerp Adjustments — Jettison and Fire — Cutting 
Away Wreck. Stranding — Injury to Engines or Sails — Thirds Off. 
Separation of General and Particular Average — Freight — Border- 
line Cases. 

CHAPTER 19 

Particular Average 313 

Most Claims are for Partial Loss — Particular Average Refers to a 
Special Interest — Particular Charges — Comparison of Gross 
Sound and Damaged Values — Comparison of Gross Values Justified 
— Comparison of Net Values Unfair — Freight and Duty — Policy 



CONTENTS XV 

Paqb 

Value Controls — Determining Depreciation by Appraisal — Salvage 
Losses — Certificate of Damage — Special Adjustments — Effect of 
Average Clauses — Cause of Loss — Particular Average on Profits 
and Commissions — Particular Average on Hull — Apportionment of 
Expenses — Temporary Repairs — ^Valuation of Hulls — Cause of 
Damage to Hulls — Partial Loss of Freight — Collectible Freight — 
Substitution of Vessel or Cargo — Freight Not Always Involved in 
Damage to Ship or Cargo — Protest of Master — Proofs of Loss — 
Duplicate Documents — Certificate of Enrollment. 



CHAPTER 20 

Total and Conbtbuctivb Total Losses. War Losses 327 

Definition — Constructive Total Loss — Adjustment May be Simple 
— ^Assured Must Endeavor to Preserve Property — When Is a Thing 
Lost? — When Does a Constructive Total Loss Occur? — ^American 
and English Practice Differs — Abandonment — Tender of Abandon- 
m^it — Validity of Abandonment — Tender Must be Promptly 
Made — ^Acceptance of Abandonment — Effect of Acceptance — 
Abandonment May be Deferred by Mutual Consent — Assignment 
Dates from Time of Loss — ^Abandonment of Vessel Involves 
Freight — No Abandonment if Loss Not Due to Insured Peril — 
Total and Constructive Total Loss of Vessel — Total Loss of Cargo 
— Total Loss of Freight — Proximate Cause — :War Losses. Missing 
Vessels — Presumption of Cause of Loss — Perplexing Problems — 
Doubtful Cases — The Right of Subrogation — Salvage — Carrier's 
Liability — Carrieris Slow to Respond for Losses — Benefit of In- 
surance Clauses — ^Loan Receipts. 



CHAPTER 21 

Brokers. Mutual Companies 342 

The Business of Insurance — Brokers — Not a New Factor — Brokers 
Indispensable — Occupies an Anomalous Position — The Broker 
Offers Service — A Trained Expert — The Broker Knows the Market 
— Progressive Underwriting — The Broker's Duty Twofold — The 
Broker's Attitude Toward Losses — The Broker Arranges Settlement 
of Losses — ^The Broker's Services in General Average — Commis- 
sions — Broker Does Not Guarantee Payment of Premiums — The 
Broker as an Underwriter — A Difficult Relation — Brokers in 
England — Losses and Return Premiums — ^Current Accounts — 
Mutual Companies — Theory Sound in Principle — Method of 
' Organization — Distribution of Earnings. Scrip Certificates — 
Redemption of Scrip — Policy Holders Not Subject to Assessment. 



xvi CONTENTS 



CHAPTER 22 

Pagb 

Opficb Organization. The Annual Statement 356 

Departmental Organization — Purpose of Records — Organization 
Divided into Three Sections — Underwriting Department — In- 
spection Department — Binders — ^Line or Excess Department — 
Customer's Records — Certificate and Policy Departments — 
Collection Department — Participating Companies — ^Loss Depart- 
ment — ^Appraisers — ^Loss Adjusters — Financial Department — 
Cashier's Department — Transfer Department — Accounting De- 
partment — Agency Department — Statistical Department — Marine 
Insurance Not an Exact Science — Preparation of Statistics — 
Deductions — Statistics Must be Accurate — Annual Statement — 
Income and Disbursements — Assets and Liabilities — Under- 
writing and Investment Exhibit — Schedules — Publicity in 
Insurance. 



APPENDIX A 
Standard Application Form Used in Special Risks on Cargo 370 

APPENDIX B 

Standard Form Used in Requesting Return Premium, Either 
Because op Cancellation or Reduction op Risk 372 

APPENDIX C-1 
American Hull Underwriters Association Form, 1917 373 

APPENDIX C-2 
American Hull Underwriters Association Form, 1918 377 

APPENDIX C-3 
American Hull Underwriters Association Form for Builders Risk 380 

APPENDIX D 
Lake Time Clauses 382 

APPENDIX E 
Marine Insurance Act, 1906 387 



CONTENTS xvil 

APPENDIX F 
Mabinb Insurance (Gamblinq Policies) Act (1909) 415 

APPENDIX G 
The Harter Act 417 

APPENDIX H 
York-Antwerp Rules op 1890 419 

APPENDIX I 
Average Bond 424 

APPENDIX J 
General Average Guarantee 426 

Index 427 



A Selected List of Reference Books 

Frederick Martin: History of Lloyd's and Marine Insurance in 
Great Britain. 

Gregory-Keller-Bishop: Physical and Commercial Geography. 

Douglas Owen: Ocean Trade and Shipping. 

Thomas Walton: Know your own Ship. 

Franklin Escher: Elements of Foreign Exchange. 

Willi ARD Phillips: Treatise on the Law of Insurance. 

Theophilis Parsons: Law of Marine Insurance and General Average. 

William Gow: Marine Insurance. 

William Gow: Sea Insurance. 

Frederick Temfleman: Marine Insurance: Its Principles and Practice. 

George Maitland Lazarus: A Treatise on the Law relating to Insur- 
ance of Freight. 

Thomas Gilbert Carver: Carriage by Sea (6th Edition by James S. 
Henderson). 

Ernest W. Congdon: General Average. 



XIX 



MARINE INSURANCE 



HISTORICAL INTRODUCTION 

THE HISTORY OF MARINE INSURANCE, ITS ORIGIN, 

GROWTH AND PRESENT STATE 

Origin of Marine Insurance Doubtful. — ^Marine Insurance is 
the oldest form of indemnity of which there is any record. It 
is known to have been practised for over seven hundred years. 
When, where and by whom it was first devised, however, re- 
mains one of the unanswered questions of commercial history. 
Several nations have claimed the honor of having invented 
this system of indemnity, but the best evidence indicates that 
the Jews, at the time of their banishment from France in the 
latter part of the twelfth century, introduced such a scheme of 
insurance for the protection of their property during its removal 
from France. Villani, a fourteenth century historian, is the 
authority for this theory, stating that the system was devised in 
Lombardy in 1182. Whether this is correct or not is of little 
moment — ^the fact remains that early in the development of 
commercial intercourse the need arose for some system of dis- 
tributing marine losses, and the present method of msuring came 
into use. 

Ancient Commercial Activity. — In order to obtain a proper 
perspective of marine insurance, it is important to trace the 
development of commercial intercourse among the nations of 
the world. That the seas were used as the highways of trade 
early in the history of man is evidenced by both sacred and 
profane history. In the Bible there are many references to 
ships, especially to the ships of Tarshish in one of which Jonah 
was fleeing from Joppa to Tarshish when the ship was overtaken 
by a mighty tempest. The story of Jonah is interesting in this 
connection in that there appears a perfect example of jettison, 

1 



2 MARINE INSURANCE 

one of the perils covered by the present marine insurance policy, 
when, on account of danger, the mariners cast forth into the 
sea the wares that were in the ship in order to lighten it. This 
experience occurred in B. C. 916, about the time that the Rhodi- 
ans obtained sovereignty of the sea. 

Early Forms of Insurance. — ^The Rhodians were originally an 
agricultural people but early in their history turned to commerce 
in order to dispose of their surplus products. They were har- 
assed by their neighbors, who continually waged war upon them, 
but by B. C. 916, they had obtained the mastery of the sea. 
About this time they promulgated a system of maritime juris- 
prudence, which has become the basis of the Roman code and 
of all modern laws relating to commerce and navigation. No 
reference to insurance is found in this system, but General 
Average is recognized as a commercial custom. Bottomry Bonds 
were also in use early in commercial history, and a word of 
explanation in regard to these two forms of indirect insurance 
will be of interest. 

General Average.-r-It was customary in the early days for 
merchants to travel with their wares and there might be in the 
same ship several merchants, each journeying with his goods 
in order to sell them at the port of destination and there buy 
other goods with the proceeds. During the course of the voyage 
let it be supposed that a severe storm arises threatening the safety 
of the ship and making necessary the casting overboard of part 
of the cargo in order to lighten the vessel. Naturally a dispute 
ensues as to whose goods shall be sacrificed, each merchant pre- 
ferring that his neighbor's goods and not his own be cast out. 
There is, however, little tune for argument when a ship is labor- 
ing in a storm and, to prevent such disputes and to effect the 
saving of vessels and their cargoes without having all the loss 
fall on any one or two individuals whose cargo could most easily 
be jettisoned, the custom arose of having each person interested 
in the venture, whether shipowner or cargo owner, contribute 
to make. good the loss suffered by those whose property was 
sacrificed. This custom soon obtained the force of law and is 
now part of the commercial code of all maritime nations. The 
word average, as used in marine insurance, means loss or damage, 
so that a General Average is a loss falling generally on all the 



HISTORICAL INTRODUCTION 3 

interests involved in a maritime venture as distinguished 
from Particular Average or a loss falling on one particular 
interest. 

Bottomry Bonds. — In the early days of commercial history 
shipowners and cargo owners were accustomed to borrow money 
with which to carry on their ventures, by pledging their vessels 
or their cargoes as security for such loans. The document 
setting forth the terms of the agreement was known as a Bot- 
tomry Bond when the vessel was pledged, and a Respondentia 
Bond when the cargo was hypothecated. By the terms of 
such agreement the sum named in the bond was loaned, subject 
to the condition that it should be repaid upon the arrival of 
the vessel at a named port. If the vessel was lost the borrower 
was discharged from his obligation. The rate of interest which 
such bonds carried was very high, since the lender practically 
insured the property. The rate of interest charged, which like 
the principal simi was payable only in the event of safe arrival, 
included compensation not only for the use of the money loaned, 
but also for the possible loss of the money itself through the 
failure of the venture. This method of loaning money was 
really the reverse of our present system of marine insurance. 
At the present time the underwriter charges a rate of premium 
on an amount representing the fair value of the vessel or cargo, 
plus the insurance premium and other expenses, which amount 
he agrees to pay in the event of the vessel or cargo being lost 
through perils insured against. 

Forms of Bottomry Bonds Distinguished. — Under the bot- 
tomry bond system the lender in effect paid for the property at 
the beginning of the venture, the borrower repaying the amount 
loaned plus interest (premium) on safe arrival. This form of bot- 
tomry bond which represents a voluntary pledge of property, 
must be distinguished from bonds called by the same name, which 
the master of a vessel in distress must make when all other 
means of raising funds, to effect repairs in order to save vessel 
and cargo, have failed. The conditions in regard to the re- 
payment of the amount loaned, plus maritime interest, as it is 
called, are the same in this latter form of bond as in its earUer 
prototype. Under present mercantile usage, loans on vessels 
are made by the exiecution of a bond secured by a mortgage on 



4 MARINE INSURANCE 

the hull, which in turn is protected by a policy of insurance 
payable to the lender. 

Grecian Commerce and the First Insurance Exchange. — 
Among the early maritime nations are found the Greeks whose 
commerce, while extensive, was confined largely to the Euxine 
Sea, especially at Corinth and Athens. A development of 
interest to the student of marine insurance is an Exchange which 
the Greeks estabUshed at Athens for the placing of bottomry 
bonds. In a very interesting monograph on '' Marme Insurance 
in Old Greece,"^ Dr. Benjamin W. Wells describes the operation 
of this exchange and the news system working in connection with 
it. The bankers and merchants operated swift dispatch boats 
which brought early news of wars and nmaors of wars and of the 
state of the market, so that vessels could be diverted to safe ports 
and to favorable markets. The whole scheme seems to have 
been a forenmner of the modem Lloyd's, London. It also ap- 
pears that human nature has changed little since the days of the 
early Greeks, for Dr. Wells cites numerous cases brought into 
court for the collection of money loaned on bottomry, where it is 
charged by the lender that the vessel or cargo has been lost under 
suspicious circumstances. It is quite evident from the argu- 
ments made by counsel in these reported cases that insurance 
by bottomry bond was an estabUshed and essential feature of 
commercial transactions not only in Ancient Greece, but also in 
the other maritime nations. 

The Carthaginians, Phoenicians and Romans. — Early in the 
development of commerce the Carthaginians and the Phoenicians 
exercised a potent influence in the markets of the then known 
world. These nations later fell a prey to Alexander, who de- 
stroyed their cities and removed their commerce to Alexandria. 
But Alexandria too passed away and at the dawn of the Christian 
era Rome held sway as the mistress of the world. Rome is re- 
membered, however, not for her commercial progress, but rather 
for her military achievements. In fact it was the policy of Rome 
to discourage mercantile endeavor as being harmful to the state. 
The commerce of the Roman Empire consisted largely in carrying 
supplies and provisions for her armies of conquest. Nevertheless, 
the Roman bankers were not averse to investing their surplus 

^ Insurance and Commercial Magazine, March, 1918. 



HISTORICAL INTRODUCTION 5 

funds in bottomry bonds, notwithstanding the fact that the 
loaning of money at interest was discouraged. In fact, by an 
edict of the Roman Emperor Justinian, dated A. D. 583, a rate 
for such loans was fixed at twelve per cent. After the fall of the 
Roman Empire little information is obtainable for many cen- 
turies in regard to the development of commerce. 

Commerce in the Middle Ages. — ^With the revival of commerce 
in the Middle Ages there developed two centers of commercial 
activity, the one in the Mediterranean Sea, the other in the Baltic 
Sea. The Venetians and Genoese were the leaders in the Medi- 
terranean, these two peoples becoming the merchants of the 
world. They had been driven down from their homes in Central 
Europe to the shores and adjacent islands of Italy, where they 
were able not only to defend themselves against their enemies, 
but also to establish an overseas commerce that covered the 
whole of the then known world. The Crusades did much to 
increase the prosperity of these peoples, as their cities made 
convenient supply stations on the road to the Holy Land, and 
they were not slow to take advantage of the situation. The 
returning Crusaders had acquired a taste for the products of 
the Eastern nations, and the Italian merchants imported and 
distributed these goods to the other European peoples. 

The Hanseatic League. — The commercial activity in the 
Baltic Sea was also controlled by peoples who had been driven 
out of Central Europe by the Barbarians, but had fled North 
and established various centers of conrnaerce on the Baltic and 
North Seas. As a measure of mutual protection these several 
communities perfected an organization known as the Hanseatic 
League, which undoubtedly was the most powerful ofiFensive and 
defensive conmaercial alUance which the world has ever seen. 

The First Sea Codes. — In the ''Laws of Wisby," a sea 
code compiled probably in the early part of the fourteenth 
century for the government of the Hanseatic League, reference 
is made to Bottomry. It is, however, in some of the Collections 
of Ordinances, decreed at general meetings of the Hanseatic 
League, that regulations are promulgated for the correction of 
abuses in connection with the issuance of Bottomry Bonds. 
These sea codes known as "Recessus Hansse" and "Recessus 
Civitatum Hanseaticarum" indicate that at this period the 



6 MARINE INSURANCE 

practice of Bottomry was still an important part of maritime 
commerce. 

Early Insurance Rules. — ^Frederick Martin in his interesting 
work on "The History of Lloyd's" states that one of these early 
"Recessi," issued at Lubeck, where most of the meetings of the 
Hanseatic League were held, devotes a whole chapter to the 
subject of Bottomry. It appears from this record that insiu'ance 
frauds are as old as the business itself. The sixth chapter of this 
"Recessus'' states that: 

"Whereas there occur every day more deceptions as regards Bottomry, 
and there is not wanting even discovery of wicked crimes, it is ordered 
that henceforth masters of vessels shall have no power to raise money 
on Bottomry at the place where the freighters reside, in order that the 
free parts of the ship may not be burthened with charges resting on 
those that are engaged. And in case masters wish to raise money on 
Bottomry on parts belonging to them, it must be with the knowledge 
of the freighters, at the place where they live, and only to the extent 
of their interest. Should anybody lend more than this, he who has 
advanced the money shall only have a claim on the master's property 
and not on the ship, and the master, if necessary, shall be punished.'' 

In another paragraph of the same chapter an exception is made 
to the above rule, and permission is granted to masters, should 
they meet with accidents in foreign countries and have no goods 
to sell, to pledge the vessel to raise money to effect repairs. The 
amount to be thus raised, however, is Umited to the sum required 
to make such necessary repairs. In the event of the master rais- 
ing money in foreign countries in a fraudulent manner, he was 
held answerable not only with his property, but might also incur 
the penalty of imprisonment and even death. 

Modem Marine Insurance. — The Hanseatic codes indicate, 
however, that bottomry was practised more in the sense of loans 
made of necessity to efifect the preservation of the venture, and 
not as a mere insurance proposition. Marine Insurance in its 
direct form having been introduced among the merchants of the 
Mediterranean Sea, it is altogether probable that it was adopted 
at a very early period by the members of the Hanseatic League. 
The Lombards and the Hansa merchants controlled the commerce 
of the world. The Lombards operated as far north as Bruges, 
and the Hansa merchants controlled commerce from Bruges 



HISTORICAL INTRODUCTION 7 

north. The two groups of merchants traded with one another 
and as will appear both groups had their share in the development 
of commercial England. 

First Use of Word Insurance. — There is a4 old historical work 
called the "Chronyk van Vlaendern'' in which the term insur- 
ance in the modern meaning of the word appears. The authen- 
ticity of this "Chronyk'' has been doubted, but Frederick Martin 
in his work cited above says, '' if there is no evidence that has come 
down to us — ^in its favor, neither is there any against it." The 
words of this "Chronyk" read in part as follows: "On the demand 
of the Inhabitants of Bruges, the Count of Flanders permitted 
in the year 1310, the establishment in this Town of a Chamber 
of Assurance, by means of which the Merchants could insure 
their Goods, exposed to the Risks of the Sea, or elsewhere, in 
paying a stipulated Percentage." Bruges was one of the leading 
ports of the Hanseatic League, where much of the trading between 
the Hansa merchants and the Lombards took place and it is not 
imreasonable to suppose that some such insurance market was 
there established. It is recorded that as many as one hundred 
and fifty vessels would arrive at Sluys, the outer harbor of Bruges, 
on a single tide. Such commercial development at so early a 
period m maritime history seems incredible. 

The Age of Discovery. — Commercial development was not con- 
fined, however, to the Lombards and to the Hansa merchants, 
but with the perfecting of a practical mariner's compass, other 
nations rapidly entered the overseas trade. The "Age of 
Discovery" was ushered in. Mariners no longer needed to skirt 
the shores of the continents or dash from headland to headland, 
but could fearlessly launch out into the deep on voyages of dis- 
covery and conquest. It was discovered that the world was 
round and not square, and that by sailing West the East was 
reached. The taste which Europe had received of the products 
of the East had developed a real and growing demand for these 
commodities, but the long and hazardous overland haul from 
India to the Eastern shores of the Mediterranean led to the 
demand for a quicker and less expensive route. This was soon 
found by the hardy mariners who braved the terrors of the 
unknown oceans in their frail vessels and opened up new avenues 
of commerce. Soon Spain, Portugal, France, Holland and last. 



8 MARINE INSURANCE 

but not least, England entered into the race for commercial 
prestige and Colonial development. 

Rules to Prevent Misuse of Insurance. — With this rapid 
growth in overseas commerce it is not sm-prising that marine 
insurance grew into a definite system of indemnity and that 
the various continental nations issued ordinances and codes 
which set forth the usages and customs relating to marine in- 
surance and laws for the government of its practice. The 
earliest of these codes is the ordinance issued by the Magistrates 
of Barcelona in 1435. The necessity of law arises because men, 
uncontrolled, take advantage of their weaker fellows, and this 
first code relating to marine insurance is no exception to the 
rule, for it is largely concerned with the prevention of fraud in 
connection with marine underwriting. Rules are included in 
this ordinance limiting the amount which may be insured on 
certain vessels and prohibiting altogether the insurance of 
vessels owned and freighted by foreigners. The code also pro- 
vides that those ''who write policies shall be bound to see that 
they are properly drawn'' and, differing from modern practice, 
requires that the policy must be signed by the Assured or his 
representative, "who must declare on oath the particulars of the 
insurance." Wager policies were prohibited and in order that 
the premium might be secured to the underwriter it was provided 
that the policy was of no effect unless the premimn was actually 
paid and acknowledged in the contract. On the other hand, 
the underwriter was held to a strict compliance with his contract, 
the time within which proved losses and losses arising from cases 
of missing vessels must be paid being minutely described. 

Insurance Well Established in Fifteenth Century. — This first 
ordinance of Barcelona was followed by others issued in 1436, 
in 1458 and in 1461, while in 1468 the Grand Council of Venice 
issued a decree in regard to the place of trial for actions arising 
out of marine insurance disputes and a somewhat later decree 
issued in Venice deals with the still prevalent custom of carrying 
unsafe deckloads. While these ordinances and similar ones 
issued in Florence, Bilbao and other cities are of exceeding 
interest in tracing the growth of marine insurance customs and 
practice, they are also of great importance from the historical 
standpoint as indicating very clearly that by the fifteenth cen- 



HISTORICAL INTRODUCTION 9 

tury marine insurance was well enough established to require 
stringent rules governing its practice and to prevent its abuse. 

The "Guidon de la Mer." — One of the most interesting of all 
the early works on marine insurance is the ''Guidon de la Mer," 
written by an unknown author late in the sixteenth or early in the 
seventeenth century and apparently published in Rouen, France. 
This work gives a rather complete outline of the rules and 
conditions under which marine insurance was practised at this 
time. It appears that not only were contracts of insurance 
required to be in writing, but it was necessary to have such 
contracts enrolled as public acts before a register and with- 
out such registration the policies were null and void. Cer- 
tain elaborate rules are set down for the government of the 
register or greffier, as he was called. Among other things he was 
required to collect a fixed fee for his services and to keep in his 
office a collection box for the poor, into which the Assured was 
ordered to drop "six deniers for every thousand of Uvres as- 
sured." Indications appear in the ''Guidon" that at the time of 
its issuance marine insurance was generally practised in all 
the Continental countries and in England and that policies 
made in one country were payable in another at a fixed rate of 
conversion for foreign currency. A form of poUcy also 
appears in the "Guidon" which conforms closely to the earUest 
English policy dated 1613 and found in the Bodleian Library 
at Oxford. 

Marine Insurance in England. — While it is of interest to trace 
the growth of marine insurance in Continental Europe, the 
American student is more deeply interested in the rise and growth 
of insurance in England. Our system conforms more closely to 
the system common in England where marine insurance has 
reached its highest development than to that of the Continental 
countries. England, the last of the European countries to obtain 
prominence as a commercial nation, has now outstripped them all 
and is the mistress of the seven seas. Two streams of influence 
shaped the commercial and incidentally the marine insurance 
development of England. The earliest influence was that of the 
Hanseatic League which for nearly five centuries controlled to a 
large extent the foreign commerce of England. The later in- 
fluence was that of the Lombards, who, driven out of their 



10 MARINE INSURANCE 

homes in Italy, settled in various parts of Europe, many of them 
finding refuge in England. 

The Hansa Merchants and the Steelyard. — The Hansa mer- 
chants foimd in England a fertile field for the practice of their 
efficient commercial methods, because the English monarchs in 
the early history of the country were more interested in fighting 
their neighbors and in defending themselves from attacks at 
home and abroad, than they were in the development of the 
country. Incidentally, these English kings were always in debt 
and they found the Hansa merchants accommodating lenders at 
first, but severe task masters at last. These merchants estalj- 
lished themselves in London in what was known as the Steelyard, 
a group of buildings in which they lived and stored their mer- 
chandise. They lived under the strictest discipline. They 
neither married nor were they permitted to associate with the 
gentler sex. They were commercial monks, living a narrow but 
a luxurious life, for all that was best of every land came to 
their hands. Their rules and regulations were not only for the 
personal government of the members, but related also to the 
commercial and political affairs of the organization. They en- 
tered England in the tenth century and three hundred years 
later were the favorites of English Royalty, and for a time at 
least, practically controlled the trade of England. But such 
consideration on the part of England's kings could have but one 
result. The first signs of the coming commercial superiority of 
the English people were beginning to show and the native mer- 
chants rose in their wrath to drive out these Teutonic tradesmen. 
The men of the Steelyard, however, were deeply entrenched in 
the commercial life of England and it was only after a bitter 
struggle that these traders were finally banished and the won- 
derful era of commercial progress was ushered in with the coming 
to the throne of Queen EHzabeth. Disliked as these Hansa 
traders were by the English merchants, they helped in large 
measure to lay the foundations of that overseas trade which has 
made England the commercial leader of the world. The members 
of the Hansa League practised marine insurance and probably in- 
troduced into England this branch of commercial activity. 

The Lombards in England. — The Lombards, whose impress is 
deeply marked on the commercial history of England, while 



HISTORICAL INTRODUCTION 11 

engaging to a certain extent in overseas commerce, reached their 
highest success as money lenders. They too, having funds with 
which to finance the wars of England's Kings, found great favor 
with them and received many privileges not accorded to the 
native citizens. The first great wave of Lombard traders reached 
the shores of England about the middle of the thirteenth cen- 
tury and as their power and wealth increased many of their 
fellows from Lombardy and other places on the Continent joined 
them. The men of England, however, were highly incensed 
against these "usurers." In order to satisfy the demands of the 
people the Kings of England issued many edicts for the control 
of the Lombard bankers. The Kings themselves, nevertheless, 
continued to borrow from them, regardless of the fact that the 
rates charged on their loans violated their own decrees. Not 
only did the Lombards become money lenders to Britain's mon- 
archs, but they also were the fiscal agents of the Pope, selling 
pardons and collecting and remitting to Rome the revenues of 
the Church. 

Lombard Street. — Prospering greatly but nevertheless being 
persecuted by the pubUc, the Lombards petitioned King Henry 
IV to grant them a section of the City of London in which they 
might build their homes and conduct their trade in security. 
The King, probably in return for some financial accommodation, 
granted their petition, and there was allotted to them a portion 
of groimd, on which the Lombards built their homes and which 
took the name of Lombard Street. This street has become 
famous in marine insurance history, and even to this day there 
appears in the Lloyd's form of policy this clause: 

"And it is agreed by us, the insurers, that this writing or policy of 
assurance shall be of as much force and effect as the surest writing or 
policy of assurance heretofore made in Lombard Street, or in the Royal 
Exchange, or elsewhere in London." 

Departure of Hansa Merchants and Lombards. — ^Little in- 
formation is obtainable in regard to the commercial and insurance 
transactions of the Lombards, but it is certain that with the 
decline in power of the Hansa merchants in Europe, the Lombards 
gained a considerable part of their trade and at the close of the 
fifteenth century much of the overseas commerce of England was 



12 MARINE INSURANCE 

in their control. This is evidenced by an Act of Parliament of 
1483 and by subsequent Acts reciting the evil practices of the 
Italian merchants and endeavoring to curb their activities. 
With the coming of the day of England's commercial awakening, 
the Lombard' s power began to decline. Gradually the Italian 
merchants quitted England, some returning to their ancestral 
homes, others finding new fields of activity in the Continental 
countries. 

Influence of Foreign Merchants. — While the Hansa merchants 
left their greatest impress on the bartering side of trade, the 
Lombards firmly established in England the banking and insur 
ance branches of commercial activity. Marine insurance 
introduced into England by the Hansa merchants was perfected 
by the Lombards, and at the time of their passing from England 
the practice of this branch of mercantile endeavor was well 
establidied. 

First English Marine Insurance Statute. — In the forty-third 
year of the reign of Queen Elizabeth, in December, 1601, four 
years after the last of the Hansa merchants had left England, 
there was passed by Parliament "An Acte concerninge matters 
of Assurances amongste merchantes." This Act stands as a 
landmark in the history of marine insurance, not because the law 
itself had any very great influence on the course of the business, 
but because it is the first English Statute in regard to marine 
insurance. The purpose of this act was the estabUshment of 
a special court for the trial of marine insurance cases in order to 
expedite their adjudication. The court although regularly 
organized was Uttle used, merchants preferring to have their 
cases tried in the regular courts. It is interesting to note the 
preamble of this statute, which reads in part as follows: i.e., 

"Whereas it ever hathe bene the policie of this realme by all good 
meanes to comforte and encourage the merchante, therebie to advance 
and increase the general wealthe of the realme, her majesties customes 
and strengthe of shippinge, which consideracion is nowe the more 
requisite because trade and traffique is not at this presente soe open 
as at other tymes it hathe bene; And whereas it has bene tjrme out of 
mynde an usage amongste merchantes, both of this realme and of 
forraine nacyons, when they make any great adventure (speciallie 
into remote partes) to give some consideracion of money to other 



HISTORICAL INTRODUCTION 13 

persons (which commonlie are in noe small number) to have from them 
assurance made of their goodes, merchandizes, ships and things ad- 
ventured, or some parte thereof, at suche rates and in such sorte as the 
parties assurers and the parties assured can agree, which course of 
dealinge is conmionlie termed a policie of assurance; by means of 
whiche poUcie of assurance it comethe to passe that upon the losse or 
perishinge of any shippe there followethe not the undoinge of any man, 
but the losse lightethe rather easilie upon many than heavilie upon 
fewe, and rather upon them that adventure not than those that doe 
adventure, whereby all merchante, speciallie the younger sorte, are 
allured to venture more willinglie and more freely." 

In a later part of this Act reference is naade to causes "arisinge 
out of pollicies of assurance, suche as now are or hereafter shall 
be entered within the office of assurances within the Citie of 
London,'' indicating that the Continental system of officially 
recording poUcies was followed in England. 

Individual Underwriters. — ^At this time imderwriting was done 
by individuals, many of whom were bankers or money lenders 
and adopted underwriting as an additional method of employing 
their funds. These men had no general gathering place, but 
policies were carried around by brokers, who obtained from each 
underwriter his acceptance of a share of the risk. Each individual 
noted on the policy the amount of liability which he assumed and 
signed his name; hence the term underrvriter. 

Lloyd's Coffee House and Lloyd's News. — The introduction 
of the use of coffee and with it the establishment in London of 
coffee houses, where the bevert^e was dispensed, had a decided 
effect on the course of marine insurance in England. Notwith- 
standing an ordinance of Charles II closing the coffee houses on 
the ground that they were breeding places for sedition against 
the government, these gathering places continued to prosper. 
Some of them became the meeting places of merchants and mari- 
ners where, over the fragrant cups of coffee, the latest marine 
news was discussed. One of these houses was conducted by 
Edward Lloyd, a man of no mean ability who, seeing that this 
marine gossip might be of general interest, began in 1696, the 
publication of "Lloyd's News." This small sheet, most of the 
numbers of which are to be found in the Bodleian Library, rep- 
resents the germ idea from which has grown the present news 



14 MARINE INSURANCE 

service of Lloyd's, London. After the publication of seventy- 
six numbers, the government, angered over some item appearing 
in the ''News" stopped its publication. Thirty years later the 
paper again appears as Lloyd's List and under this name is still 
published. 

A Meeting Place of Underwriters. — Gradually Edward 
Lloyd's coffee house became the meeting place of many of 
London's Underwriters and here they underwrote their risks. 
Not only was underwriting carried on in this cofiFee house, but 
ships were sold and merchandise was auctioned. Merchants 
and shippers frequented its rooms and all kinds of business in- 
cidental to shipping was transacted. Advertisements appearing 
in papers published in the early years of the eighteenth century 
constantly refer to this coffee house as the place of sale of ships, 
goods, real estate, and stocks, and as the meeting place of the 
stockholders of associations. Lloyd's coffee house was indeed 
the mart of many kinds of trade and the story of its evolution 
into the modem London Lloyd's is one of the interesting chapters 
in commercial history. 

Insurance Companies Organized. — In a day when the English 
people had run wild in the incorporation of companies for the 
doing of every conceivable thing, at a time when the South Sea 
Bubble was expanding but had not yet burst, it is not surprising 
that the field of marine insurance was invaded and efforts made 
to do corporation underwriting. Individual underwriting had 
by this time, the early part of the eighteenth century, brought 
fortunes to not a few. The security for the insurance was, 
however, individual security and it did appear that better pro- 
tection could be given by a corporation with a definite known 
capital under the control of the government. Not only would 
this better security be given, but the profits arising from the 
conduct of the business would be distributed to many persons, 
owners of the stock of the corporation. The underwriters who 
congregated at Lloyd's coffee house and others who had pri- 
vate oflSces earnestly opposed the estabUshment of a chartered 
marine insurance company. Many arguments pro and con were 
advanced, those petitioning for the incorporation claiming that 
many individual underwriters failed and could not pay their 
obligations, a charge not well substantiated. On the other hand. 



HISTORICAL INTRODUCTION 15 

underwriters proved that the business could be better carried 
on by individuals, since its conduct required personal skill and 
experience which a corporation could not give. They also 
showed that underwriting was not practised on the Continent 
by corporations and that the existing system had adequately 
met the needs of England's growing commerce. The House 
of Commons sided with the underwriters and the project died 
down only to be revived in 1720, when a new and always powerful 
argument was presented on behalf of the petitioners, who on this 
occasion sought the establishment of two corporations. The 
finances of England were in an embarrassing condition, owing to 
the civil list being burdened with heavy debts which Parliament 
was unwilUng to pay. The incorporators therefore skillfully 
proposed that in exchange for the granting of the two charters, 
including a monopoly of corporation underwriting, they would 
pay into the exchequer for the discharge of debts on the civil 
list the smn of £600,000. This proposal struck a responsive 
chord in the heart of King George I, and a Royal message was 
sent to the faithful Commons strongly recommending the passage 
of the biU granting the two charters. 

The Monopoly. — ^Notwithstanding serious opposition, the bill 
became a law and charters were granted on June 24, 1720 to the 
London Assurance Corporation and the Royal Exchange Assur- 
ance Corporation. These two companies thus received the 
exclusive right and monopoly as corporations, of insuring 
ships and their cargoes. The fears of the individual under- 
writers that their business would be ruined proved groundless. 
The volume of business obtained by the corporations was small, , 
and, in the early years of their operation, the results were un- 
successful. By a saving clause in the bill which provided for the 
monopoly, the charters were subject to forfeiture if the install- 
ments of the £600,000 payment were not forthcoming at the 
dates provided. The companies failed to make the payments as 
required, but owing to the influence of their sponsors, ParUament 
reduced the debt to £150,000, which sum was ultimately re- 
ceived by the Government. 

Growth of Marine Insurance. Lloyd's. — ^For the next hundred 
years during which the two corporations made a slow growth, 
the business of the individual underwriters increased by leaps 



16 MARINE INSURANCE 

and bounds. Instead of being a hindrance to these under- 
writers, it was soon seen that the monopoly was a protection to 
them in that it prevented the estabHshment of other competing 
companies. In 1769 the underwriters who congregated at 
Lloyd's cofifee house formed a definite organization and obtained 
the control of Lloyd's List. One object of the organization 
was to stamp out the gambling which, under the guise of insur- 
ance, was being carried on at the Coffee House. Such insurances 
concerned every conceivable subject from the result of a political 
election to the probable duration of the life of a prominent 
citizen who might be sick and dying. The underwriters thus 
organized imder the name of "Lloyd's" moved to the Royal 
Exchange, the idea of the coffee house still being continued. The 
control of this particular part of the organization was vested 
in a head waiter and his two associates, who cared for the physical 
needs of the members "at Lloyd's." 

Standard Policy Adopted. — From this time on Lloyd's became 
the underwriting center of London. Controlled by men of 
great abiUty and integrity, resolutions were passed condemning 
the underwriting of gambling poUcies. These resolutions were 
observed by the greater portion of the membership and Lloyd's 
gained a reputation for fair deaUng, which aided not a little in 
the phenomenal success which came to its members. In 1779 
at a meeting of Lloyd's, a uniform printed form of marine in- 
surance poUcy was adopted and all the members agreed to its 
use. The Resolutions passed by Lloyd's embodying this form 
were submitted to Parliament and were approved by that body. 
Lloyd's form thus became the official English form of marine 
insiurance poUcy. 

Increase of Individual Underwriters. — ^At the time of the adop- 
tion of this form of policy marine insurance was increasing greatly 
owing to the American War which made overseas commerce 
extra hazardous and led many to insure who formerly "ran their 
own risk." This war and those which followed occupied the 
attention of the English people almost continuously for a period 
of fifty years. During this time England developed into a great 
nation and the prosperity which came to the country was not 
without its effect on the underwriting fraternity. Wealth made, 
not without great hazard but in large volume, attracted many 



HISTORICAL INTRODUCTION 17 

merchants into the underwriting field, some of whom would stake 
tens of thousands of poimds on a single venture. The rates of 
premium charged during this period remind one of those which 
were received during the World War. History has also repeated 
itself in that there were in both cases, certain leaders in the mar- 
ket who estabUshed rates, others relying on their superior judg- 
ment and blindly following them. 

Efforts to Incorporate New Companies. — The natural conse- 
quence of this great prosperity was the desire on the part of many 
to enter the marine insurance field as corporation underwriters, 
but the monopoly created in 1720, proved an effective barrier to 
such efforts. The two corporations and the underwriters at 
Lloyd's were now business friends and no longer rivals and 
j oin tly resented all efforts made to break the monopoly. Business 
had naturally gravitated to Lloyd's as the companies, while 
engaging to some extent in marine insurance, preferred the fields 
of fire and life insurance with their surer rewards. The original 
grant of monopoly in its saving clause permitted the termination 
of the special privilege if it were found at any time that the 
monopoly was "hiuiiful or inconvenient to the pubUc." Rely- 
ing on this phrase, in 1798 the directors of the Globe Insurance 
Company who wished to enter their company in the marine field 
petitioned ParUament for a repeal of the monopoly, but, opposed 
by the power of Lloyd's, the petition died in committee. Making 
new efforts in 1806 and 1807 the Globe Company was again de- 
feated and ceased from its efforts. Again in 1809 a powerful 
group of men petitioned for the repeal of the monopoly, but they 
too were unsuccessful. This time, however, the question was 
thoroughly discussed before Parliament, able speakers advocating, 
respectively, both the repeal and the retention of the monopoly. 
From the debates one gains a very clear view of the state of marine 
insurance in England at^this time and a very clear presentation of 
the powerful position which Lloyd's had assinned. However, 
the most potent argument presented by the opposition in the 
mind of the House of Commons was that the repeal of the mo- 
nopoly would not only injure Lloyd's, but would probably destroy 
the ''system of commercial intelligence" of Lloyd's which was not 
only essential to marine insurance but to commerce in general. 
Frederick Martin in his history gives a detailed account of these 



18 MARINE INSURANCE 

debates, together with pen pictures of some of the leading figures 
in the marine insurance world at that time. During the investi- 
gations made at this time by the special committee of ParUament, 
much evidence was presented showing that insurance frauds were 
exceedingly common at this period. This was largely caused by 
the fact that the punishment meted out to such offenders was not 
commensurate with the gravity of the offenses. 

Lloyd's Reorganized. — The efforts made to defeat the repeal 
of the monopoly brought home to the members of Lloyd's various 
defects in their own organization. As a result a committee 
was appointed and a new constitution was drawn up and adopted 
providing rules for the admission of members, their government 
and for the care of the meeting place of the organization. These 
rooms were still operated on a modified plan of the old coffee 
house idea. The control of the organization was vested in a 
governing committee of twelve, who were charged among other 
things with the duty of appointing Lloyd's Agents. The post 
of Lloyd's Agent in a foreign port had by this time become a posi- 
tion of honor, much sought after, and men of the highest standing 
in their respective communities occupied these positions. The 
work of these agents did much to stamp out shipping frauds 
and the wealth of commercial information gathered from their 
reports was of immeasurable value, not only to the commercial 
world, but to the Government as well. 

The Monopoly Repealed. — The insurance monopoly was finally 
broken on the 24th of June, 1824. The circumstances leading up 
to the repeal of this Act (the 6th of George I) are not without 
interest and show how sUght incidents sometimes have great 
results. Nathan Rothschild, son of the great German banker, 
had emigrated to England and there became a commercial and 
financial power. His brother-in-law, Benjamin Gompertz, a 
distinguished mathematician, sought the appointment to the 
vacant post of actuary of a large insurance company, but failed 
because he was a Jew. He appealed to the powerful Nathan, 
who, infuriated at this slight to his reUgion, vowed that he would 
create a bigger company than any existing and provide a better 
position for his relative than the one he sought. Immediately 
gathering together some of his prominent and influential friends, 
Rothschild organized the "Alliance British & Foreign Fire and 



HISTORICAL INTRODUCTION 19 

Life Assurance Company" with a capital of £5,000,000. The 
shares of the new company under the magic of the Rothschild 
name were quickly subscribed. The directors then petitioned 
parliament for the repeal of the marine insurance monopoly 
so that the new company could engage in this branch of insurance. 
The main argument advanced for the repeal of the old Act was 
that competition in the marine insurance field might be free. 
The opposition argued that there was sufficient competition, there 
being over one thousand underwriters at Lloyd's, and that the 
creation of this gigantic company would throttle competition and 
a new monopoly would be created. Nevertheless the repeal of 
the monopoly was approved, but Nathan Rothschild had one 
further bridge to cross. The prospectus of the AUiance Company 
only providing for fire and life insurance, one of the members of 
Lloyd's, who had purchased fifteen shares in the new company, 
conmienced suit against the directors to restrain them from enter- 
ing the marine insiu*ance field as a breach of the contract entered 
into between the directors and the subscribers, and the court up- 
held this view. Nothing daimted, Nathan Rothschild, imme- 
diately organized the "Alliance Marine Insurance Company,'' 
the active management of which was given to Benjamin 
Gompertz. 

New Companies. — The fears of underwriters at Lloyd's that 
company competition would ruin their business again proved 
groimdless. The pubUc was slow to leave the old paths of 
marine insurance and the Alliance Company met with only 
moderate success. In 1840 finding that the huge capital of 
five milUon pounds was unnecessary^ a reduction to one milUon 
was made. The subsequent history of marine underwriting 
in England is one of the organization of many companies and of 
the failure of most of them. However, now and again, records 
are found of the estabUshment of new companies which, carefully 
organized and managed, prosper and with the Alliance still aid 
in caring for the vast values which enter the English market 
seeking protection. 

Marine Insurance Law. — No history of marine insurance in 
England would be complete were reference not made to the 
development of the law relating to this branch of commercial 
activity. The Continental nations were given to the codifica- 



20 MARINE INSURANCE 

tion of their laws, and, as already indicated, many commercial 
codes are founds The English legal mind, however, tended 
rather to draw conclusions from precedents than to bind itself 
% by any definite code of laws. The court for the trial of insurance 
cases, organized in the reign of Queen Elizabeth, never achieved 
its object. Merchants and imderwriters preferred the regular 
courts of law. In these courts the judges decided cases by con- 
sidering the Continental codes and the usages of merchants in 
England respecting the case in point, drawing their conclusions 
and basing their judgments on these precedents. It is interest- 
ing to note that up to the middle of the eighteenth century 
there appear in the English court records less than one hundred 
cases relating to insurance. It is not reasonable to presume, in 
view of the growth of marine insurance, that this is any indica- 
tion of the fact that disputes did not arise in connection with 
marine insiu*ance transactions. Rather does it indicate that 
merchants were not satisfied with the learning of EngUsh jurists 
of this time and preferred to settle disputes out of court by arbi- 
tration or by some other method of reference before men ex- 
perienced in the customs of commerce. 

Lord Mansfield. — ^In the year 1756 there ascended the bench 
as Lord Chief Justice of England the Earl of Mansfield and for 
thirty-two years thereafter he molded and clarified English 
law. Of broad knowledge and of keen intellect he took insurance 
law as he found it, both in the Enghsh precedents and in the Con- 
tinental codes, and appUed it in the Ught of commercial customs 
and usages to the cases presented to him, and developed a body 
of law which is today the basis of both English and American 
practice. Mr. James Allen Park in 1786 published, with the 
approval of Lord Mansfield, a work entitled "A System of the 
Law of Marine Insurance," which gathered together the English 
decisions, especially those of Lord Mansfield. This book in 
which the decisions are divided into groups relating to the various 
branches of marine insurance law is still a work of great value 
and is the basis of many of the English and American law 
books on the subject. 

The Marine Insurance Act, 1906. — The need of a definite 
code on the subject of marine insurance was often brought to 
the attention of ParUament without any degree of success. As 



HISTORICAL INTRODUCTION 21 

time passed and the decisions grew in number, inconsistencies 
crept into the law and it was difficult indeed to know whether 
or not one stood on firm ground. The laws which Parliament 
did pass in regard to marine insurance merely sought to pre- ^ 
vent gambling practices or related to stamp taxes. In the latter 
years of the nineteenth century several efforts were made to 
pass a bill codifying the English Law, and for twelve years 
the question was before Parliament, various committees con- 
sidering these measures. Finally in 1906 the Marine Insurance 
Act was passed, followed in 1909 by the Marine Insurance 
(Gambling Policies) Act. These two acts are now the 
controUing law of England with respect to marine insurance. 
The Gambling Policies Act has quite effectually stamped 
out the dealing in wager policies which, prior to the 
enactment of the law, were engaged in by all classes of the 
English people. 

Early Underwriting in the United States. — The history of 
marine insurance in the United States is rather colorless. Closely 
joined to England by ties of blood and of custom, it is not sur- 
prising that in the early history of the Colonies insurance on 
American risks was placed with English xmderwriters. Early 
in Colonial days, however, some effort was made to establish 
a local market. In 1721 one John C. Capson inserted in 
the American Weekly Mercury of May 26th published in 
Philadelphia, an intimation that he was about to open an 
office of public insurance on vessels, goods and merchandise. 
He stated that ''the merchants of this city of Philadelphia and 
other ports have been obHged to send to London for such insur- 
ance, which has not only been tedious and troublesome, but 
ever precarious, and for the remedy of which this office is opened.'^ 
Four years later another office was opened in the same city by 
Francis Rawle. Of the success of these offices Uttle is known, 
but it is certain that for many years thereafter no record is f oimd 
of any attempt to establish a marine insurance office. In New 
York City an insurance office was opened in 1759 and in 1778 
we find the New Insurance Office entering the underwriting 
field. All of these offices were conducted on the Enghsh plan 
of individual or partnership imderwriting, incorporated insurance 
companies not yet entering the field. 



22 MARINE INSURANCE 

First American Insurance Corporation. — In 1792 there was 
organized in Pliiladelphia, then the commercial metropolis of 
the new United States, the first incorporated company for the 
transaction of fire and marine insiu'ance, the Insurance Company 
of North America to which a formal charter was granted on April 
14, 1794, by the General Assembly of Pennsylvania. The early 
history of this company is closely interwoven with that of the 
nation itself, and it is greatly to the credit of the management of 
the company' that it was able to survive, considering the wars and 
rmnors of wars which disturbed the early years of the American 
Republic. After a very unsatisfactory experience with private 
underwriters, of whom at least fifty operated in the City of 
Philadelphia, merchants welcomed the new company and busi- 
ness flowed to it in a constantly increasing stream. 

Corporation Development. — The corporate system being ini- 
tiated, the idea spread rapidly and soon similar organizations 
were being formed in New York, Boston, Baltimore, New Haven, 
Charleston, and Newburyport. These and other companies 
soon after formed met with a reasonable degree of success for a 
time, owing to the prosperity which attended shipping interests 
in the early years of the country's history. The Napoleonic 
Wars greatly distiu-bed the peaceful conduct of commerce and 
caused a great demand for insurance. War has ever been a 
stimulant to the marine insurance business, bringing as it does 
increased hazards and correspondingly increased premiums. 
It does not necessarily follow, however, that such periods are 
periods of prosperity for marine underwriters, and these early 
wars with their consequent heavy losses at times brought 
many insurance companies to the verge of ruin. During the first 
ten years of the existence of the Insurance Company of North 
America, the average premium rate was twelve percent, but the 
payment of losses absorbed over ninety-one percent of the pre- 
mium income. Periods of partial prosperity followed those of 
adversity, but with the opening of the war of 1812, the marine 
market again faced disaster. The shipping of the United States 
to a large extent being driven from the seas, marine insurance 
declined, not to be firmly reestablished for thirty years, when 
with the growth of a new merchant marine, insurance again be- 
came a profitable employment for capital. 



HISTORICAL INTRODUCTION 23 

Competition Among Companies and Failures. — The high 
premiums resulting from our own war and those which preceded 
it, had attracted into the field many companies which met with 
little success. The dawn of peace in 1815, with its attendant 
loss in war premium income, inaugurated a period of bitter 
competition. The volume of business was insufficient to employ 
the capital invested and in the endeavor to obtain a share, com- 
panies wrote risks at inadequate rates, with the inevitable result 
that many of them failed. Then too, those who were managing 
the companies lacked financial insight and in an endeavor to 
pay dividends neglected the creation of surplus funds to aid in 
this day of disaster. Lack of governmental control permitted 
these and other abuses to exist and grow. This thirty-year 
period was in fact a testing time for the whole country. The 
new nation was suffering its growing pains and was making all 
the mistakes of adolescence. 

The Clipper Ship and Insurance Frauds. — The merchant 
marine had been gradually reviving and shipowners were ob- 
taining a new measure of prosperity. With a virgin coimtry 
amply suppUed with woods fit for shipbuilding, it was but natural 
that from the earUest days the people should turn to shipbuilding. 
Models were improved as time went on and finally the cUpper 
ship, the glory of the American Merchant Marine, was produced, 
and won from the ships of all the world the mastery of the sea. 
The renaissance of the merchant marine preceded by some years 
the revival of profitable underwriting. Between 1828 and 1844 
the companies were seriously crippled by many fraudulent losses 
occurring in the West Indies and the Gulf of Mexico. Owing to 
the lack of cohesion among the companies, however, it was not 
until 1844 that any concerted action was taken to control these 
losses. In this year the Philadelphia underwriters formed a pro- 
tective organization, one of the main purposes of which was the 
prevention of fraudulent claims. 

Marine Insurance Revives. — Following the panic of 1837 with 
its attendant failures, those companies which were able to 
weather the financial storm entered on an era of prosperity which 
continued for about twenty years. The American cUpper ship 
was now developed to the point where it wrested most of the 
overseas carrying trade from England and the Continental 



24 MARINE INSURANCE 

countries. The ships and their cargoes being American owned, 
it was but natural that the marine insurance should be placed 
with American underwriters. New companies were organized, 
many of them meeting with phenomenal success. The voyages 
of the clipper ships, while short, judged by standards of that 
time, were long compared with steamer voyages, and the rates 
of premium accordingly were high. So well built were these 
ships and so skillful were their masters that the insurance pro- 
duced a handsome profit to the underwriters. 

The Civil War, — This era of prosperity was, however, short- 
Uved. England, somewhat baffled by the success of the cUpper 
ship, sought for some antidote, and found it in iron as a medium 
for construction and in coal as a producer of motive power. 
Soon metal ships steam propelled were navigating the seas and the 
glory of the cUpper ship began to fade. Slow to develop her 
untold resources of iron and coal, the United States began to 
decUne as an overseas carrying nation. Before American ship- 
builders realized that iron and coal were to control overseas 
conunerce, the nation was engulfed in the Civil War, which added 
impetus to the decUne of the American Merchant Marine and 
carried with it the decUne of most of the insurance companies 
and the fall of many. Burdened by heavy taxation and deprived 
of the large overseas traffic in farm products, especially cotton, 
American shipping and its allied interests, were terribly crippled. 
Great Britain, not slow to grasp her opportimity, entered a new 
era of shipbuilding and ship operating. Her new metal vessels 
propelled by mechanical power were soon produced in great 
numbers and before many years carried much of the overseas 
trade of the United States. 

Foreign Companies Enter the United States. — Handicapped by 
the period of reconstruction following the Civil War and preju- 
diced by the attitude of foreign classification societies which 
discriminated against American built vessels, the American 
merchant marine steadily declined and with it the fortunes of the 
marine insurance companies which had survived the war. To 
further add to the burdens of the companies, short-sighted legis- 
lation permitted the entrance of foreign insurance companies 
into the American market on terms which further militated 
against the success of the American companies. The first 



HISTORICAL INTRODUCTION 26 

British Company entered New York state about 1871, quickly 
followed by many others. These companies had been organized 
for many years, were carefully managed, had large surpluses 
and immediately began a drive for American business by cutting 
rates. The American Companies not so well prepared to meet 
this sort of competition were gradually forced out of the marine 
business. Some were liquidated, others which did both a fire and 
a marine business devoted their efforts solely to fire insurance. 
The lesson in this trying period of marine insurance develop- 
ment in the United States has not yet been fully learned. Com- 
panies still fail to maintain adequate surpluses and often carry 
as assets doubtful items and as habilities amounts much too 
small to properly care for unadjusted losses. Rigid state super- 
vision has done and is doing much to correct abuses of this nature. 

Decline of American Merchant Marine. — ^When this period of 
competition had passed, the American market was composed of a 
very few American companies and a comparatively large number 
of British companies. Much of the cargo business to and from 
the United States was insured in the American market, but the 
hull business was to a great extent placed in the British market 
and British underwriters prescribed the form of policy on which 
such insm-ance was written. By this time less than ten percent 
of the overseas commerce of the United States was carried in 
American vessels. As trade follows the flag, so, too, marine 
insurance protection, which is but one element in the conduct of 
trade, is ordinarily furnished by citizens of the same flag, with 
the result that marine insurance was diverted from the American 
market. 

The Marine Insurance Market Broadens. — The last years of 
the nineteenth century ushered in a new era in the history of 
the United States. Following the period of depression com- 
mencing in 1893, there was a tremendous revival of American 
trade. After the Spanish-American War the nation found itself 
a World Power with new responsibihties and with new conamercial 
fields to conquer. The coastwise trade of the United States, 
wisely restricted to American vessels, increased greatly. New 
vessels were built, both on the Seaboard and the Great Lakes. 
Gradually the American marine insurance market obtained 
a larger and larger share in this hull business and eventually 



26 MARINE INSURANCE 

through underwriters' organizations has determined rates and 
conditions for the conduct of this business, which the British 
market has followed. 

Little American Capital Invested in Marine Companies. — Not- 
withstanding the gradual control which the American market 
obtained in the conduct of local business, it must not be forgotten 
that the larger part of the capital employed in the Atlantic, 
Lake and Pacific marine insurance markets was foreign capital 
and the profits on this business, in large part, were received 
not by American investors, but foreign shareholders in companies 
domiciled in this country. In the other branches of insurance, 
although foreign companies had entered the field, most of the 
capital invested was American. Profits while perhaps small 
were reasonably certain in all departments of insurance except 
marine, and the fair profits of some periods were not sufficient 
inducement, in view of the history of the business, to attract 
American capital into the marine field. 

Steady Growth of Marine Insurance. — Thus a gradual growth 
and strengthening of the marine market appears in the first 
thirteen years of the twentieth century. A few new American 
companies were organized, and the market as a whole reflected 
in some small measure the prosperity and expansion of the 
United States. Stricter regulation by the State Governments 
was enforced, but no effort was made either locally or nationally 
to protect American companies against the encroachment of 
foreign competition. Neither was any real efifort made to foster 
American shipping by governmental aid. On the other hand, 
through efforts made to aid seamen, laws were passed which 
succeeded in driving most of the American vessels in the foreign 
trade, to seek registry under foreign flags. This was in brief 
the condition which existed when the World War commenced. 

The World War and New American Companies. — Stunned 
by the outbreak of the war, all commercial activities were for a 
time disorganized, but gradually recovering poise, the need for* 
ships and for American insurance became insistent. Bankers 
were unwilUng in many cases to accept the insurance certificates 
of companies of belUgerent countries and many American 
companies, formerly confining their activities to fire insurance, 
entered the marine field. New companies have been organized 



HISTORICAL INTRODUCTION 27 

and many of Scandinavian, Spanish and other neutral nation- 
alities have established themselves in the American market. 
The increased value of tonnage and the doubling and trebhng of 
cargo values, with the enormous increase in the rates of freight, 
have created a demand for marine insurance which at times has 
taxed to the utmost the insurance markets of the whole world. 
The New York market, where before the war about thirty com- 
panies were actively engaged, now boasts over one hundred. 
Limits of a few hundred thousand dollars formerly exhausted 
the capacity of this market, where now a milUon dollars is easily 
placed. While the entrance of the United States into the war, 
with the attendant commandeering of ships and goods depressed 
the activity of the marine insurance market, the extensive 
shipbuilding program of the country, with the future prospect 
of an American Merchant Marine, representative of the greatness 
of the United States as a commercial power, presages a golden 
future for the practice of marine insurance. 

The Future of Marine Insurance in the United States. — 
Whether or not this prospect of the future will become a reaUty, 
depends in large measure on the wisdom of those who mold our 
pubUc opinion and who make our laws. The history of marine 
insurance in the United States is noted for the paucity of laws 
interpreting the law of marine insurance and for the control of 
its conduct. An insurance code drawn up as part of a suggested 
legal code for the State of New York failed of adoption in 1865, 
but forms the basis of the insurance law of California, enacted 
in 1873. Laws affecting insurance are in force in most of the 
States, but they are more regulatory than explanatory, es- 
pecially in their reference to marine insurance. However, the 
States in many cases have not been slow to tax marine insurance 
companies in such a way that the domestic company suJBfers a 
disadvantage over the foreign company. Then, too, American 
underwriting is handicapped by insurance placed with foreign 
non-admitted companies which enters this country on very 
advantageous terms, paying only a small tax. If marine insur- 
ance, now firmly estabUshed in the American market, is to retain 
its prestige, it must have a fair competitive field. European na- 
tions long ago reaUzed that marine insurance was one of the hand- 
maids of commerce and by fostering laws have strengthened and 



28 MARINE INSURANCE 

encouraged its growth. Dealing in large part with interstate 
and international commerce, it would seem natural that the 
control of this branch of conmierce should be vested in the 
Federal Government rather than in the State Governments, 
which often times working at cross purposes, interfere with the 
legitimate growth of the business by burdensome taxation and 
double taxation. The same result could be accomplished, per- 
haps, by uniformity of state laws in regard to marine in- 
surance and measures looking to this end are already in 
contemplation in connection with the National Association of 
Insurance Commissioners. Federal laws placing American com- 
panies on the same basis as foreign companies domiciled here 
and making marine insurance entering this country from abroad 
through the mails, subject to reciprocal taxation would do 
much to establish on a firm foundation a business which is as 
essential to the growth of our commerce as is the building of 
ships and the strengthening of our banking facilities. 



CHAPTER 1 

PHYSICAL GEOGRAPHY IN ITS RELATION TO 

MARINE INSURANCE 

Effect of Natural Conditions on Trade Routes. — Marine 
insurance having been originated for the purpose of distributing 
losses caused by the physical forces of nature operating on and 
about the oceans, it would seem fitting for the student of the 
subject to acquire at the very outset some general knowledge 
of these elements. Man from the earliest days has battled with 
these forces, sometimes going down to defeat, only to rise again 
to devise some new method of conquering them. If he could not 
overcome these adverse conditions of nature then he sought means 
to avoid them or to accommodate himself to their effects. The 
earliest trade routes were overland, following the paths of least 
resistance. Thus, if there were hills, or lakes, or forests interven- 
ing in the direct path of his journey, primitive man would avoid 
these obstacles by going round them. Man, however, differing 
from the beasts of the field in being a thinking anunal, soon 
began to create rude devices for overcoming the obstacles in his 
commercial paths. A trail would be cut through the forest, 
a rude craft would be built to cross a lake or river, thus avoiding 
the necessity of encircling these barriers. His rude craft, how- 
ever, encountering the winds, waves and currents found on the 
lakes and rivers soon showed its defects and a stronger vessel was 
built. 

Water Routes. — Since water routes offered the easiest means 
of communication between the settlements of primitive man, it is 
but natural that he should have discovered means of navigating 
these highways. The overcoming of the simple physical forces 
operating on the inland waterways was a comparatively easy 
task, and the natural love of adventure coupled with the desire 
for barter, in the course of time led man down to the larger seas 
and finally to the oceans where he found the mighty forces of the 
deep aiding him in their periods of calm, but when unleashed 
4 29 



30 MARINE INSURANCE 

threatening him with destruction. Gradually he acquired a 
knowledge of these physical barriers which hindered the un- 
restricted use of the waterways, but not having developed suffi- 
ciently to devise means of overcoming them, he was compelled to 
skirt along the shores of the continents in his rude craft, darting 
from headland to headland seeking shelter in time of storm and 
laying to at night. Often to avoid treacherous stretches of 
water, man would drag his rude craft overland, or tranship his 
cargo over a neck of land to calmer waters beyond. 

Natural Law Discovered. — ^The growth of commerce created 
the desire for easier and safer routes of travel, and men 
began to study the forces of the universe in order to control 
them. Certain individuals in advance of their generation began 
to discover that there was such a thing as law in nature and that 
these natural forces, untamed as they seemed to be, were but the 
effects of the sun and the moon and the stars. They discovered 
the rudiments of astronomy and by means of the stars were 
enabled not only to navigate at night, but to navigate during 
the darkness away from the coast lines and over the broad 
expanses of inland seas such as the Mediterranean. It was also 
discovered that the earth instead of being flat was round and 
there were mariners courageous enough to brave the terrors of 
the unknown oceans in an effort to prove that by sailing West 
the East Indies, the fabled land of the Middle Ages, could be 
reached. 

Ocean Navigation. — Once entering the mighty expanses of the 
oceans, the hardy mariners discovered that the physical forces 
which they had encountered on the inland seas, were magnified 
many fold. In these great bodies of water vast flowing streams 
were found, and over their surface were belts of wind and 
sections of calm. Then again the physical forces would be un- 
loosed and the surface of the deep would become a raging mael- 
strom in which they would be all but engulfed. The faith of 
these pioneers being vindicated by the discovery of America 
and of the ocean routes to the East Indies the overcoming or 
circumventing of these physical forces became increasingly neces- 
sary, if man was to obtain the full use and enjoyment of his 
world. Gradually gaining knowledge by experience, in time, 
the laws governing the action of these forces of nature have been 



PHYSICAL GEOGRAPHY 31 

determined and their effects discovered. By applying this knowl- 
edge to navigation, types of vessels have been developed able to 
resist the action of these forces. As the localities and times of 
greatest danger became known, these were avoided. Not only 
has this been done, but man has gone further and has adopted 
these forces for his own use and has laid out his water routes 
over those portions of the oceans where he can be aided by the 
winds and the currents. 

Aids to Navigation. — With the development of commerce and 
the establishment of more stable poUtical control, governments 
have lent their aid in charting the oceans, in estabUshing Ught 
houses on dangerous coasts and in providing a weather service 
which warns mariners of impending storms. Scientific societies 
by many devices and by especially designed and equipped ships 
have added greatly to the store of knowledge in regard to the 
ocean and much has been done to aid in the safety and certainty 
of ocean navigation. Great as has been the progress much re- 
mains yet to be done. The knowledge now attained and the 
progress already made in ocean navigation merely encourage 
further research in an effort to better comprehend the workings 
of nature and to overcome or to turn to the use of man the 
powerful forces which nature has let loose on the broad expanse 
of the ocean. 

Effect of the Oceans on Climate. — That the task is a stupen- 
dous one, may be appreciated if thought is given to the vast- 
ness of the oceans, and to the distances covered in the negotia- 
tion of the ordinary routes of commerce. Seventy-two per- 
cent of the earth's surface is covered by water ranging in depth 
from a fraction of an inch to six miles and stretching from the 
equator to the poles. This enormous expanse of water with 
its tides and currents, its winds and storms not only separates 
the land masses but also determines to a large degree their 
cUmates and to a very great extent has influenced man's de- 
velopment. This may readily be seen by comparing land masses 
in the same latitudes. The British Isles bathed by the warm 
waters of the Gulf Stream are a veritable garden while in the 
same latitude, Labrador, whose coasts are washed by the Arctic 
current, is a frozen waste. Not only is climate affected, but 
the variation of temperature is controlled by the oceans, making 






32 MARINE INSURANCE 

life more enjoyable. In far inland sections very wide daily and 
annual ranges of temperature occur, while in the vicinity of 
the oceans the slow heating and cooling water exercises a con- 
trolling influence on the temperature. 

Ocean Distances are Great. — The distances over the routes 
of commerce between the various centers of hmnan endeavor, 
following as they do the lines of least resistance, are very great. 
From Liverpool to New York is about 3000 miles while the dis- 
tance from New York to the River Plate is 5700 miles. Again 
from New York to Sydney, Australia is 13,000 miles when the 
Cape route is used and 9700 miles if the shorter Panama Canal 
course is followed. A steamer traveling from Seattle to Yoko- 
hama covers 4250 miles, and another 1725 miles is traversed if 
it continues on to Manila. Even the distances of inland waters 
are not often appreciated, the distance from Duluth, Minn, to 
the mouth of the St. Lawrence being about 1675 miles, and from 
the head of navigation on the Mississippi to the Gulf of Mexico 
2150 miles. From New York to Iquitos, Peru, on the Amazon 
River is 6000 miles and 2400 miles must be covered in sailing 
from Seattle to Nome, Alaska. 

The Physical Force of Nature. — It is with the physical forces 
of nature, however, that marine insurance is concerned. Were 
the waters always calm, were there no fogs or currents, there 
would be little need for insurance except against fire and man's 
own acts resulting in collisions and war perils. But with the 
possibility of nature letting loose her weapons at any time some 
means of indemnity against the destruction caused by her forces 
is necessary. A description of these forces will give an indica- 
tion of the problems with which a marine underwriter is 
confronted. 

The Wind and Storms. — First may be considered the wind. 
The atmosphere is ever in motion and man has learned to use 
this movement for the propulsion of his craft. In the earUest 
times he devised a rude form of sail to aid the oarsman in the 
movement of his vessels, but soon wind power displaced man 
power. Atmospheric conditions, however, control the velocity 
of the wind and when conditions are ripe storms break forth 
under which the sturdiest ships may succumb, or they may 
be wrecked or driven on dangerous coasts through the effects 



PHYSICAL GEOGRAPHY . 33 

of these storms. While there are storms which are sporadic, 
there are other storms which are periodic. These periodic 
storms occur most frequently in the Tropics, those in the Atlantic 
Ocean being called hurricanes while those in the Pacific Ocean 
are called typhoons and in the Indian Ocean monsoons. There 
are belts of wind known as the Trade Winds which blow con- 
stantly at a velocity of from ten to thirty miles an hoiu*, and are 
found between 28° north and 28° south of the equator. These 
winds blow from the northeast in the northern hemisphere and 
from the southeast in the southern hemisphere. North and 
south of the Trade Winds are other belts of wind known as the 
WesterUes, These winds in the Southern Hemisphere are fairly 
constant between latitude 40° and 50° South blowing from the 
southwest and are known to sailors as the ''Roaring Forties." 
It is interesting to note in this connection as showing the effect 
of winds on ocean trade routes, that a sailing vessel in going from 
New York to Sydney, Australia, sails southeast until the island 
of Tristan da Cunha is reached in latitude 37° South and then 
taking advantage of the short Unes of latitude and of the power 
of the * 'brave west winds," the Roaring Forties, runs before the 
wind. If the destination is Bombay instead of Sydney the vessel 
will turn north at about longitude 80° East and taking advantage 
of the Monsoons, seasonal winds of the Indian Ocean, speed north. 
In the Northern Hemisphere the westerly winds are not constant, 
and produce the exceedingly severe storms encountered in the 
North Atlantic. The causes of these winds are many and these 
belts of wind move north and south with the changing seasons. 
In between these wind belts are areas of calm, the doldroms, 
which also move with the seasons, and it is in these sections of 
calm at the seasonal changes that the hurricanes and typhoons 
originate. These storms which last at times for weeks are of 
such severity that only the staunchest ships can outride them. 

.Effect of Wind on Ocean Routes. — While the wind in th# darys 
of saihng vessels was the all important factor in determining'^he 
routes of commerce, it is only to a slightly less extent considered 
today in the laying out of steamship courses. The amount of 
resistance offered to wind pressure by a gigantic steamship is 
great and if this resistance can be avoided in the case of head 
winds or availed of in the event of following winds, fuel consump- 



34 . MARINE INSURANCE 

tion will be reduced and an economic gain result, provided the 
distance between ports is not materially increased. Accordingly 
in looking at a map upon which are impressed the steamship 
routes the prevailing winds will be found to have been con- 
sidered, as well as the ocean currents, of which mention will be 
made. In the North Atlantic for instance will be seen summer and 
winter tracks for steamers plying between New York and Liver- 
pool. These courses have been determined to some extent by 
the prevalence of ice at certain seasons, but to a greater degree 
are the result of sailing vessel experience in choosing the 
most acconmiodating routes. The voyage across the Atlantic 
from New York to the United Kingdom, owing to the 
prevailing Westerly Winds and to the current of the Gulf 
Stream, is a much safer trip than the return passage, where the 
resistance of both these forces is encountered. For this reason 
it was said by sailors in the days of the saihng vessel that it was 
"down hill to Europe. " 

Wave Force. — One of the most powerful of the physical forces 
of nature is the wave. Caused principally by the wind and the 
tide this movement of the surface water exerts a power that is 
beyond measurement. Upon this force to considerable extent, 
depends the location of harbors. Many otherwise commodious 
havens have been rendered useless by wave action, and others 
have been saved only by the building of breakwaters or other 
devices, which curbed this natural force. It will also appear in 
the consideration of ships and shipbuilding that wave force is 
and has been one of prime consideration in the designing and 
construction of ships. While the appearance of the wave from 
the shore or from the deck of a vessel indicates that a great body 
of water is rapidly approaching, this is not the case. Were the 
appearance a reality ocean navigation would be almost impos- 
sible as the wave would be a ciurent against which a vessel could 
not sail. On the contrary vessels ride the waves, the movement 
continuing imder and beyond the vessel causing some retardation 
of the vessel's progress, but under ordinary conditions ofifering 
no serious hindrance to navigation. It is only when waves attain 
great size, speed, and height that they are a menace to naviga- 
tion. Then unless a vessel is skillfully navigated to meet the 
onrushing waves serious results will ensue. 



PHYSICAL GEOGRAPH Y 35 

The Power of Waves, — When it is considered that in severe 
stonns waves attain a length of 1000 feet, a height of forty feet 
and move forward at the rate of 60 miles an hour some idea of 
their power is obtained. Waves have been described as a 
"transference of form not of substance." This is an accurate 
description. Wave motion may be likened to a movement of a 
field of grain in the wind. There is an appearance of wave 
motion, the heads of grain seem to move across the field but in 
reaUty merely crowd together, bend down and regain their 
upright position. So an examination of water movement shows 
that the particles of water move in orbits; each individual particle 
starts forward, rises, retreats, and falls, completing its orbit 
during the passage of a single wave.^ The real menace in wave 
motion is when the movement is interrupted. When a wave 
strikes a ship and breaks over it, the weight of water falling on 
the vessel is measured in tons and imless the decks are properly 
constructed to quickly throw ofif this burden of water the vessel 
may sink. Many times a wave breaking against the ship will 
carry away its upperworks, admitting water into the holds and 
causing serious damage. Oil is often poured on the water when 
waves are becoming a menace to a vessel. The effect of oil is 
to smooth the surface of the water, thus presenting less resistance 
to the wind and preventing the breaking of the wave, which is the 
real danger in wave motion. The power of waves when their 
movement is arrested by harbor works or breakwaters is great 
beyond description. Waves have been measured with a pressure 
of three tons to the square foot. The havoc wrought by these 
storm waves may be seen on any shore and their action sets up 
shore currents which are a menace to navigation. When it is 
considered that Galveston was destroyed by a four-foot wave 
and that the water fronts of Mobile and other Gulf cities have 
been severely damaged many times in recent years by wave action 
caused by the West Indian hurricanes, some conception will be 
gained of the enormous power of waves. 

Seaquakes and Tidal Waves. — ^Another form of wave which 
has done great damage to harbors and to shipping is that induced 
by "seaquakes." When an earthquake occurs the faulting of 
the earth may reach out under the ocean and the violent change 

* Gregory, Keller &, Bishop, "Physical and Commercial Geography,*' p. 6. 



36 MARINE INSURANCE 

in the ocean bed produces a difference of level in the water which 
results in a wave which causes the water to regain its level. This 
wave striking the shore carries all before it and many times ships 
have been carried inland so far that with the receding of the water 
it was impossible to restore them to their native element. These 
waves are usually called tidal waves, a term also used to describe 
the waves produced by the inrushing tide in confined bays. A 
combination of wind and high tide often produces a water level 
in a harbor greatly in excess of the normal, overflowing docks 
and causing heavy losses to marine underwriters. 

Tides. — The action of the sun and moon working in con- 
junction on the water masses of the earth produce what are 
known as tides. This effect may be noted even in the smaller 
bodies of water such as the Great lakes of the American Con- 
tinent. It is with this mighty force of the ocean, however, 
that marine insurance is concerned. While the tide originates 
twice daily in the Southern Ocean where the joint attraction 
of the sun and moon seems greatest, this great wave, nearly 
6000 miles in length travels swiftly and effects the whole body 
of water. On the broad expanses of the ocean its effect is slight, 
but when more shallow water is reached, or where the moving 
masses of water are forced into small bays, or through channels 
its effect is tremendous. Whirlpools, eddies, rushing currents, 
and in some places high waves result which offer a serious menace 
to shipping and cause innumerable wrecks. Where the topog- 
raphy of the ocean bed produces bays connected by narrow 
straits high tide may occur in one bay at the same time as low 
tide in the adjoining bay. In the effort to reestablish the water 
level the water rushes through the connecting channel producing 
currents known as eddies or races. These currents have ever 
been the dread of navigators. In early history we read of the 
Maelstrom of the Lofoten Islands and of Scylla and Charybdis in 
the Straits of Messina which were the terror of the early mariners. 
Modern seamen still shun the races at Pertland Firth and the 
Straits of Magellan. Hell Gate, Long Island, taking its evil name 
from its no less evil reputation has only been made reasonably 
safe for navigation by the removal at great cost of large masses 
of obstructing rock.^ 

^ Gregory, Keller & Bishop, "Physical and Commercial Geography," p. 11. 



PHYSICAL GEOGRAPHY 37 

Effect of Tides on Harbor Development. — The effect of tides, 
however, is not altogether bad. In fact thay are the scavengers 
of the harbors, twice each day drawing out the unwholesome water 
and again sending back fresh supplies of ocean water. Prom the 
viewpoint of commerce, it is the efifect of tide on harbor develop- 
ment that is of interest. As wiU appear later on, some of the most 
prosperous harbors owe their existence to the tide, whereas 
other harbors equally good in their virgin condition, because of 
lack of tidal flow never rise to positions of commercial greatness. 
In fact so important is the effect of tides on the usefulness of 
harbors that tidal almanacs are pubUshed giving navigators in- 
formation to enable them to approach and enter harbors at the 
most favorable hour. The saiUng and arrival of ocean vessels 
in most harbors is regulated by the ebb and flow of the tide, not 
only the depth of watei- but the strength of the current produced 
being determining factors in the movement of vessels. In many 
harbors ships can enter or depart only at the crest of the tide, 
while navigation in other ports is possible only at slack water. 
Not alone is the direct effect of tides of moment to navigators 
but indirectly the tidal currents quickly produce banks and 
channels in certain places making the charting of such water 
impossible, and necessitating the use of local pilots familiar with 
the vagaries of their particular locality. 

Ocean Currents. — While the ocean water is constantly in 
motion owing to the tide and the effect of wind, there are moving 
through the ocean certain well defined streams, following fairly 
definite courses. These streams of water are known as ocean 
currents and are interesting from the marine insurance point of 
view more because of their effect on climate, with its resultant 
productivity or sterility of life, than for any direct bearing which 
they have on the perils of the sea. These currents by moderat- 
ing temperature enable men to produce goods thus increasing 
the subject matter of insurance. So it is that the British Isles, 
wherein centers the bulk of marine insiu-ance, owe their very 
existence as a habitable land to the influence of the Gulf 
Stream. It is worthy of note in connection with these currents 
that dereUct vessels entering these streams follow their courses 
for months and years proving a constant source of danger to 
navigation and probably accounting for the loss of many vessels 
posted as missing. 



38 MARINE INSURANCE 

Calms. — The absence of wind or atmospheric movement pro- 
duces what are known as cahns and as aheady indicated in 
certain parts of the ocean belts of calm are encomitered. To the 
sailing vessel, this passive force is of the greatest importance. If 
a vessel unfortunately enters a belt of calm she may be delayed 
for days and weeks before being able to extricate herself from the 
toil of this inactive force. Not alone is the danger from delay, 
but stripped of propelling power it may be impossible to prevent 
a vessel running ashore through the drifting induced by ocean 
currents. To the steamer, however, under ordinary circum- 
stances, a period of calm offers no danger and causes no delay and 
with introduction into saiUng vessels of auxiliary motive power 
calms become of less importance as a marine problem. 

Fog. — Often times there is accompanying a period of calm 
another passive force of nature, called fog. Fog from the view- 
point of marine insurance is one of the most important of natural 
phenomena. Blotting out of view both near and distant objects 
the mariner navigates by dead reckoning and the underwriter 
payTS for the resultant losses. Fog Uke other natural phenomena 
is intermittent in most places, but in some sections of the ocean is 
more or less constant. Fog is the condensation of moisture in the 
atmosphere at or near the suriface of the ocean, and being caused 
primarily by the difference in temperature between the air and 
the water, fog will be found most prevalent where the cUmate is 
moist. Thus conditions tending to produce fog are found around 
the British Isles where the atmosphere of the naturally cool 
latitude is tempered by the moist warm air caused by the Gulf 
Stream. So, off the Newfoundland Banks in the midsummer, the 
warmer air tempered by the effect of the Labrador Current pro- 
duces much fog and makes navigation in these naturally treach- 
erous waters doubly difficult. Again off the West Coast of 
South America the warm air under the equator affected by the 
cool water from the Japan current and the backing up of wind and 
moisture by the Andes Mountains produces long periods of fog. 

Ice. — Ice is one of the passive forces of nature which is a real 
menace to navigation. Its effect when held in place is to stop 
navigation altogether by closing harbors and preventing access to 
interior porta through the rivers. The real danger, however, 
arises with the coming of milder weather and the breaking of the 



PHYSICAL GEOGRAPHY 39 

ice. Then its crushing force is given free play and vessels are 
strained causing leaks or are sunk as the result of the piercing of 
their hulls. Icebergs present a more insidious form of the 
same. peril as they are often encountered far from the regions of 
ice in the well beaten paths of ocean commerce. These huge 
masses of ice becoming detached by the spring thaws from the 
parent iceiSelds of the Arctic move slowly with the ocean current 
until they finally melt in the warmer water of the temperate zone. 
These ice masses floating six-sevenths submerged and often 
found in sections where foggy conditions prevail, have caused 
many of the ocean disasters, notable among which stands the 
destruction of the S. S. Titanic iq April, 1912. 

Darkness. — The further north or south of the Equator vessels 
sail in the fall or winter months the greater the length of the 
period of darkness. While darkness cannot be called a force of 
nature, it is so closely analogous to the physical forces under 
consideration, and it is so important a factor in ocean navigation 
that reference to it cannot be omitted. In the early days of 
navigation it was customary for vessels to lay to in the darkness, 
and only after some elementary knowledge of astronomy was 
obtained did mariners venture to navigate at night. As already 
indicated, with the development of stable governments, light 
houses have been established on dangerous coasts as guides to 
mariners. Much has been done in this direction, but more 
remains to be done. In the Baltic Sea and its connecting gulfs, 
in the North Sea and around the coasts of the Scandinavian 
Peninsula where there is much trade the factor of darkness from 
the viewpoint of marine underwriting assimaes a prominent place 
in determining adequate rates. These waters at best afford 
dangerous navigation, but when it is considered that m the winter 
months there are but few hours of daylight, the perils to mariners 
are greatly increased. 

Harbors and Their Development. — The question of harbors and 
harbor development is as important as the consideration of the 
physical forces. In the selection of harbor sites the physical 
forces and the natural topography of the ocean bed are two of the 
determining factors. Winds, waves and ocean currents are of 
nearly equal importance with shoals, reefs and bars in deciding 
whether or not a particular site is suitable for harbor development. 



40 MARINE INSURANCE 

Another factor of vital importance is the relation of the proposed 
harbor site to the hinterland. If the back country is fertile and 
access to it physically easy, whether by natural water routes or 
by the building of railroads, an otherwise unsuitable harbor site 
may be profitably improved by man. Such harbor development 
will, however , continue only so long as the artificial improvement 
is profitable. Thus it happens that several harbors on Long 
Island Soimd which have access to the interior by rivers, were pros- 
perous ports so long as small vessels sufliced for water carriage. 
With the increase in the size of vessels, the cost of removing bars 
and keeping channels open was greater than the resultant gain and 
many ports such as New Haven and New London and Provi- 
dence fell behind in the race for harbor prestige. Then again the 
topography of the ocean bed in many parts of the world is 
constantly, though gradually, changing. Shore lines are being 
elevated in some sections and depressed in others. The coast of 
Chili has risen from 20 to 30 feet in the last two hundred years. 
Part of the Swedish Coast has risen three feet a century while the 
Netherlands and our own New York and New Jersey Coasts are 
gradually sinking.^ When it is considered that in many harbors 
every foot of depth is vital to the shipping and to the prosperity 
of the port, the sejiousness of this movement will be apparent. 
Types of Harbors. — Man naturally has followed the lines of 
least resistance in the selection of harbor sites and those which 
he has selected fall into six general classes,^ viz. : 

1. Drowned valley harbors as New York, Norfolk, Puget Sound, 
San Francisco. 

2. Barrier beach harbors as Galveston. 

3. River harbors as New Orleans, London and Portland, Oregon. 

4. Coral reef harbors as Hamilton, Bermuda and Key West, Florida. 

5. Crater harbors as Aden. 

6. Artificial harbors as Port of Los Angeles (San Pedro), California 
and Manchester, England. 

Drowned Valley Harbors. — In many places harbors will pre- 
sent a combination of topographical features as in the case of 
New York where there is a drowned valley through which a 

' Gregory, Keeler & Bishop, "Physical and Commercial Geography," p. 19. 
* Gregory, Keeler & Bishop, "Physical and Commercial Geography," p. 23. 



PHYSICAL GEOGRAPHY 41 

mighty river flows oflFering easy access to the interior. Natural 
harbors as those of the drowned valley type are not retarded in 
their development because of unfortunate natural conditions. 
San Francisco will always be a leading harbor of our Pacific 
Coast, regardless of how many times the city may be shaken by 
earthquake shocks. Nature has here carved out a natural gate 
of entrance which will always be used even though there is the 
possibility of heavy toll from earthquake shock. San Francisco 
not only affords much safe harbor space but access to the interior 
is rendered easy by the Sacramento River which flows into San 
Francisco Bay. While it is essential in a harbor that there be 
sufficient depth to safely float the largest vessels which will use 
the port, too great depth may render a harbor less desirable as 
vessels will be unable to find easy anchorage ground. This fault 
is sometimes found in the drowned valley type of harbor as in the 
port of Seattle where anchorage buoys are placed to which vessels 
moor. 

Barrier Beach Harbors. — The natural flow of shore ciu-rents in 
time produces barrier beaches which afford protection from the 
force of the ocean waves and storms. In many sections these 
beaches are at the edge of a fertile hinterland and where sufficient 
depth is found in the sheltered water between the barrier beach 
and the mainland man has built harbors. The most notable 
example of this harbor type is Galveston, where at the end of" a 
barrier beach close to an ocean inlet a great and thriving port 
has been established. Fed by a back country exceedingly fertile 
the development of Galveston has been worth while, and its 
commercial supremacy has justified the great expense incurred 
in the building of wharves and in the construction of harbor works 
and channels. 

River Harbors. — The river type of harbor is perhaps the earliest 
form, as before the days of railroads, when overland commerce was 
carried on by the slow and laborious process of human or animal 
carriage, the river offered easy access to the interior. Vessels 
were of moderate draft, and because of this important cities 
were located at the head of river navigation, cities which now 
have given place to the larger ports at or near the river mouth. 
While as a rule the river harbors themselves have ample depth of 
water, the silt carried down by the river current produces barriers 



42 MARINE INSURANCE 

at the river mouth, which in the case of the larger rivers may 
assume the form of a delta. To keep clear the channel of the 
harbor site, various devices have been adopted. In the case of 
New Orleans situated about 100 miles from the Gulf of Mexico, 
by a system of jetties confining and directing the natural flow of 
the water, the river itself keeps ship channels clear and deep by 
forcing the collecting sediment out into the waters of the Gulf. 
In other river harbors artificial banks have been created to con- 
trol the river. River harbors as a rule are not located on the 
deltas as high water and increased currents often shift the course 
of the stream and may carry the river far away from the estab- 
lished harbor. 

Coral Reef Harbors. — Coral reef harbors are comparatively 
few in number and are of Uttle commercial importance. Located 
on coral islands they present several forms. The most common 
are the protecting reef type and the atoll which affords a circular 
harbor to which entrance is obtained through a narrow passage- 
way. Situated at places where there is no great back country 
these harbors are of little importance, except where they have 
been developed into coaling or supply stations on the great high- 
ways of trade. 

Crater Harbors. — The crater type of harbor has but few ex- 
amples and is of little importance commercially. Formed by 
the submerged crater of an old volcano, the prime requisites of 
easy access to a fertile hinterland are usually missing and the 
port, unless used as a way station on a trade route, develops 
little commercial importance. 

Artificial Harbors. — Not only has man conquered nature in 
the improvement of natural harbors but also in the creation of 
artificial ports. Whether or not an artificial harbor is economic- 
ally possible depends on the back country. If there is a pros- 
perous interior containing fertile fields and large manufacturing 
centers, the need for an ocean outlet will arise and man will 
convert an open roadstead into a sheltered harbor by building 
a breakwater, or by blasting out or dredging a shallow river 
channel produce a river port. An example of the first method is 
seen at the port of Los Angeles (San Pedro), California, where 
the marvelous development of Los Angeles and of Southern 
California created the demand for a convenient point of water 



PHYSICAL GEOGRAPHY 43 

contact with the rest of the world. The great shipping port of 
Glasgow illustrates the second method where a river but two or 
three feet deep has developed into a great ocean trade center. 
The expense of constructing these artificial harbors is necessarily 
great and their permanence rather uncertain. Situated in 
naturally unfavorable locations, many artificial harbors after 
the incurrence of great expense have been rendered useless by 
the forces of wind and wave. 

Open Roadsteads. — ^Along many coasts there are no natural 
harbors and the back country is not far enough developed to 
warrant the construction of artificial harbors. In these locaUties 
vessels anchor oflF shore in fair weather and discharge their 
cargoes into smaller craft which carry th. to the shore. These 
open roadsteads offer no protection from storm, and in the event 
of storm or heavy weather vessels raise anchor and make for 
the open sea. The hazards in connection with such anchorages 
are very great, and with the growth of the shore city and the 
back country breakwaters and moles are built if the coast line 
and sea bottom will permit and an artificial port arises. 

Tidal Harbors. — Many important harbors are so affected by 
the rise and fall of the tide, that tidal basins are built in which 
the water is impounded. Vessels enter and leave the basin 
on high water and the gates are then shut until the next high 
tide. In other locaUties it is usual for vessels to take the ground 
at low tide, floating again on the next flood tide. The growth 
of a country depends largely on its coast line. If there are natural 
harbors the back country will develop quickly and the seaboard 
cities will become rich and prosperous. If on the other hand 
harbor sites are few, development will be retarded. 



CHAPTER 2 

COMMERCIAL GEOGRAPHY IN ITS RELATION TO 
MARINE INSURANCE. COMMERCIAL DOCUMENTS 

The Processes of Trade. — Commercial geography is no less 
important to the student of marine insurance than is physical 
geography. While it is necessary for the marine underwriter 
and the insurance broker to know the physical conditions with 
which he is confronted, it is also essential that he have some clear 
idea of the reasons for trade and of the processes thereof. It 
has been truly said that the successful man must know "every- 
thing of something and something of everything." This is 
especially true of marine underwriting and its kindred branches. 
Without a reasonable knowledge of banking, foreign exchange 
and merchandizing, a marine underwriter is not in a position to 
clearly and logically consider the risks which are oJBfered to him. 
Some knowledge of the intrinsic quaUties of the various commodi- 
ties offered for insurance, of their mode of packing, of the con- 
ditions surrounding their shipment and of the effect of the 
elements upon them are absolutely essential in order that in- 
telUgent consideration may be given to the question of insurance. 
It is also important that a very definite knowledge be had of the 
meaning of the various shipping documents and of their purpose 
in the completion of a commercial transaction. 

Commerce is the Exchange of Products. — It is the desire of 
man to exchange products, that has created commercial activity. 
That in truth is what commerce is — ^an exchanging between 
men and nations of the products which they produce. In his 
original state, each individual provided for his own needs; he 
fed himself, he clothed himself, he housed himself. With the 
progress of time, groups of people perceived that each individual 
man had a particular gift and that by using this talent, not only 
for his own needs, but for the needs of others in his group, he 
was able to produce a better article with a less expenditure 
of effort. Individuals of a group therefore became specialists 

44 



COMMERCIAL GEOGRAPHY 45 

providing certain necessary commodities for their own use and 
for the other members of their group and thus the exchange of 
commodities between men originated. However, the specializa^ 
tion in any one group was restricted by the physical environ- 
ment in which that group lived. Nature finally sets the bounds 
of man's development. Rubber cannot be grown commercially 
in the temperate zone, neither is wheat a successful crop in the 
tropics. The nature of man is determined to a large extent by 
climate. The heat and moisture of the tropics induce lethargy, 
while the cool bracing atmosphere of the temperate zones ener^ 
gizes men and leads them into new and difficult lines of 
endeavor. 

The Demand for Goods. — ^With progress man has acquired 
new tastes and new desires. Bound down by natural conditions, 
he soon learned that the cravings of his nature could be satisfied 
only by bringing from its natural environment the raw or the 
finished product which he desired. This necessitated the carriage 
of commodities between groups and thus commercial interchange 
developed. The law of supply and demand came into play 
and commerce increased quickly as new and strange products 
were brought to the attention of an ever increasing ninnber of 
people. The early paths of commerce, as has been noted, were 
overland, or across sheltered water. The demand for the prod- 
ucts of the East, which the Crusades had ushered in necessitated 
some new method of supplying the market. Quicker and safer 
routes of travel became essential. Two solutions of the problem 
were possible, namely, first, the building of better vessels, second, 
the establishment of new trade routes. 

The Opening of New Trade Routes. — ^Both solutions were 
adopted. The golden age of discovery dawned when men and 
nations after the decay of the Middle Ages began to take on 
new life and to read nature's laws. New routes of trade were 
opened by hardy mariners who built ships staunch enough to 
withstand the ordinary action of the ocean forces. It is inter- 
esting to observe that while civiUzation originated in the East, 
it has traveled westward and its development shows a general 
westward and southward tendency. Colonization followed the 
opening of new trade routes. The theory of trade, until com- 
paratively recent times, was not well understood. Barter was 

6 



46 MARINE INSURANCE 

looked upon as a one-sided affair where the stronger or wiser 
trader reaped an advantage at the expense of his weaker or less 
skillful fellow. If the more powerful trader could not obtain 
what he wanted by peaceful means he attempted to take it by 
force. Trade can only be permanently successful when each 
trader feels that in the exchange of commodities he has reaped 
a profit whether it be measured in a symbol of exchange or in 
an added benefit acquired. 

Primitive Barter. — The earliest type of trade of which record 
exists is what is known as silent or dumb barter, a method which 
still persists among some unciviUzed tribes. Trade of this 
character is made because of lack of trust between the bar- 
gainers. Herodotus describes this method of trade as practised 
by the Carthaginians in their dealings with the African natives. 
Approaching a trading port the Carthaginians would go ashore 
with their goods, build fires to attract the attention of the natives 
and then return to their ship. The natives would approach and 
inspect the proffered merchandise, place beside it native products 
which they considered sufficient payment, and retire. The traders 
would again go ashore, examine the native goods and if in their 
opinion sufficient in quantity and value, would take them back 
to their ship and depart. If not, they returned to their ship 
empty handed to await further overtures from the natives. 
This process was continued until the traders were satisfied with 
the native offer. It is difficult to explain why the natives did 
not steal the merchandise of the traders and make away with it. 
Doubtless, however, these early traders had methods of inducing 
fear which spoke louder than words, and made this method of 
exchange at once both practical and successful. History re- 
counts that the Carthaginians pursued these peaceful methods 
of trade only when forceful measures were not apt to succeed. 

Types of Trade. — In the development of trade two general types 
appear. These are known as the Mediterranean and the Oceanic 
types. The former is represented by the early Mediterranean 
and Baltic Sea commerce, the latter by the oversea routes to 
the Orient. In marine insurance by custom a similar classi- 
fication is made into coastwise and ocean trade. The Oceanic 
type is of course the outgrowth and development of that used in 
the Mediterranean, but each class of trade has exerted and still 



COMMERCIAL GEOGRAPHY 47 

exerts its influence pn commercial development. Indeed the 
two types merge into one another and with their overland con- 
nections cover the whole earth with a network of routes over 
which the nations exchange their products. 

The Use of Symbols and the Bill of Exchange. — ^The method 
of exchanging goods has improved with the passing of time. No 
longer do individuals, except in rural districts, exchange goods for 
goods. Early in civilization it was found desirable to have sym- 
bols of value which were given in exchange for commodities. 
The Indian used wampum, other nations used salt, arrow heads 
or gold dust. Later actual money or gold or silver or the baser 
metals came into use, and among the more civiUzed peoples 
actual barter fell into disuse. With the growth of trade, however, 
it was found that there was not enough of the precious metals to 
serve the needs of trade, and its transfer from one individual or 
one country to another was attended with great hazard. Accord- 
ingly man sought and found a new method of payment by credits. 
The Jews in the twelfth century devised the bill of exchange or 
draft, which altered the whole method of conducting commerce 
and made possible the tremendous growth of international 
trade. 

Marine Insurance Essential to Overseas Trade. — It is at 
this point that marine insurance fits into modem commercial 
life. Historically it has been noted already that marine insur- 
ance in its present form origmated at about the same tune as 
the bm of exchange. This seems a logical order of progress. 
The bill of exchange when issued in conection with a shipment 
of goods, on the security of such goods, would become a mere 
unsecured debt in the event of the goods being lost or destroyed. 
Some additional guarantee was necessary in order to make the 
bill of exchange a safe substitute for actual money. This se- 
ciu'ity was and is provided by the policy or certificate of marine 
insurance. Therefore a knowledge of the method of financing 
commercial transactions becomes an essential part of the educa- 
tion of the student of maiine insurance. 

Commercial Documents. — In the ordinary commercial trans- 
action there are four documents which collectively are known 
as a commercial set. These documents represent and take the 
place of the goods themselves in the financing of the transaction, 



' 



48 MARINE INSURANCE 

and pass current in all the markets of the world. These four 
documents are: 

1. The invoice which is the merchant's bill for the goods. 

2. The bill of lading which* is the carrier's receipt for the goods. 

3. The draft or bill of exchange which is the merchant's payment. 

4. The insurance certificate which is the document of guarantee. 

An insight into each of these documents and its relation to 
the completion of a commercial venture is essential before any 
clear understanding may be had of international trade and 
finance. 

The Invoice. — First there is the invoice or bill of goods. A 
merchant in making a sale of goods, negotiates with the buyer 
as to price, discounts and terms of sale. Having agreed one 
with another the contract of sale is made and the invoice sets 
forth in writing the terms and conditions of the transaction. 
The commodities sold are listed one by one, the quantity shown 
and the price per \mit indicated. Goods are marked and num- 
bered, that is each package is stamped with an identifying 
symbol and if there is more than one package with the same 
mark, consecutive numbers follow the mark on each package. 
These marks and numbers appear on the invoice. In addition 
there may be charges for packing, cartage and consular fees. 
Whether or not charges for insurance and freight will appear 
on the invoice depends on the terms of sale. Three general 
forms of sale are common in commercial transactions, viz.: 
cost (C), cost and freight (C&F) and cost, insurance and freight 
(C.I.F.). 

Cost Sales. F.O.B. and F.A.S. — Cost sales require the seller 
to provide the goods packed and ready for shipment. The 
seller may agree to act as agent for the buyer in eflfecting insur- 
ance and in engaging freight space, but these duties are usually 
performed by a freight broker to whom the goods are delivered 
by the seller, or subject to whose order the seller holds the goods. 
In any event no charge appears on the invoice for freight or 
insurance. In other words when the merchant ships the goods 
or delivers them to the buyer's agent he is out of the transaction 
except with respect to the payment of the invoice. It sometimes 
happens that in a cost sale the amoimt of freight may appear on 



COMMERCIAL GEOGRAPHY 49 

the invoice, but such entry is merely a notice of the amount of 
freight that is or will be due the vessel and is not included in the 
total amount of the bill. The contract of sale may require that 
the seller of the goods deliver the property at a certain place 
short of destination where the buyer will take title. In such 
event notation is made on the invoice of such terms of sales as 
F.O.B. cars Chicago or F.A.S. steamer at New York. The 
letters F.O.B. are a commercial abbreviation for ''free on board. '' 
A merchant buying goods in various Western cities may arrange 
for carload lot shipments from Chicago and accordingly agrees 
with each seller that the latter will deUver and be responsible 
for the property until delivered on board the cars at Chicago. 
On the other hand a foreign buyer may wish to have no responsi- 
bility until the goods are at the shipside of the steamer which is 
to carry them to destination, and he accordingly requires the 
seller to deliver the goods F.A.S. steamer New York. F.A.S 
stands for the words ''Free along side,'' the seller assuming all 
charges and risk from the original point of shipment until de- 
livered at the side of the steamer ready for loading. 

Cost and Freight Sales (C&F). — ^A cost and freight sale 
(C & F) is one in which the seller biUs the goods at a price which 
includes the cost of the goods, the incidental packing and other 
charges and the cost of delivering the property at the ultimate 
destination. No responsibility is assumed for safe delivery at 
destination, the duty of providing insurance resting on the buyer. 
K the freight is payable at destinatiwi, the amount which will 
then be due is included in the invoice with the other charges, 
but this amount of freight is deducted at the foot, credit thus 
being given the seller so that he may assiune this charge when 
delivery is made. If the goods are not delivered in specie the 
freight will not be due. It will be noted that under a cost 
and freight sale the seller assumes the responsibility of providing 
freight room for the goods, a matter not altogether easy in time 
of shortage of tonnage. 

Cost, Insurance and Freight Sales (C.U.). — Under a C.I.F. 
Sale (cost, insurance and freight) the seller practically agrees 
to guarantee delivery of the property purchased by the buyer. 
He agrees to set the goods down at the buyer's warehouse free 
of all charges. Deduction maybe made of the amount of coUecti- 



50 MARINE INSURANCE 

ble freight as in the cost and freight sale and it may be that the 
buyer will assume responsibility for the payment of duties and 
other local charges accruing at destination. Whether or not 
these special charges will be assumed should either be clearly 
set forth in the contract of sale and noted in brief on the invoice, 
or be so well established by custom and usage as not to require 
special mention. Custom and usage play an exceedingly im- 
portant part in the conduct of commercial transactions, and in 
the absence of evidence to the contrary it will be presumed that 
a transaction is to be completed in accordance with the customs 
and usages m vogue with respect to similar transactions. Under 
C.I.F. terms the seller is not only obligated to provide freight 
space, but must protect the goods by insurance, obtaining cover- 
age in the usual form provided for the insurance of such goods 
with respect to particular average (partial loss), war risk and 
geographical limits. If the seller has quoted a lump sum price on 
the C.I.F. basis he will be Uable for fluctuations in the freight 
and insurance markets. This being so, it is quite common when 
unusual conditions prevail, as in war times, to merely fix a price 
for the goods themselves in the contract of sale, to which shall 
be added on the invoice the cost of insurance, freight and other 
charges at the rates prevailing at the date of shipment. 

Invoice Determines Relation of Buyer and Seller. — The fore- 
going explanation of "terms of sale,'' and there are many modifi- 
cations of the three forms mentioned, wiU indicate the importance 
of the invoice in settling the relations of the parties to a com- 
mercial transaction. Its importance from the viewpoint of in- 
surance will be evident, when it is considered that in a cost and 
freight sale "F.A.S. Ship'' or ''F.O.B. Ship" the seUer provides 
insiu^ance until the goods are alongside ship in the first instance 
or until on board ship under the second illustration, while the 
buyer must provide protection from that time on. In the event 
of loss occurring at the port of loading the invoice will determine 
at whose risk the property was and upon which set of under- 
writers, those of the buyer or the seller, the burden of responding 
for the loss will fall. A consular invoice accompanying the ship- 
ping documents, may be required in the shipment of goods be- 
tween foreign nations. In such case the seller having made 
out his invoice presents the same to the consul of the country to 



COMMERCIAL GEOGRAPHY 51 

which the goods are coD&igned, or through which they may 
pass, or to both. Each certifies that the invoice is proper, and 
signs and attaches the seal of his oflSce to the document. This 
vis^ by the consul indicates that the shipment has been made in 
proper form, that the price for customs purposes is fair and that 
the rules and regulations respecting such shipments have been 
compUed with. In any disturbed state of the world's commerce 
this vis6 of the consul is of the greatest importance. When war 
conditions exist various forms of export and import licenses 
may have to be obtained and other unusual requirements com- 
pUed with before shipment may be made. 

The Charter Party. — ^Before proceeding to the consideration 
of the second document in the commercial set, the bill of lading, 
it will be necessary to gain some idea of an a^eement which in 
many cases, imderUes the bill of lading. This is the charter 
party, a document embodying the terms of a contract for the 
hire of the whole or a part of a vessel. The charter party and the 
bill of lading while both relating to the ship itself may be dijBfer- 
entiated by describing the charter party as a contract for the 
hire of the vessel as a carrying medium, whereas the bill of lading 
is a contract of transportation. Owners of vessels may be 
divided into three classes, first, those who have vessels specially 
designed and constructed for the carriage of their own property, 
such as the oil tank Unes; second, companies organized for the 
transportation as common carriers of goods over certain definite 
routes and owning vessels known as "liners;" third, individuals 
or companies who enter the ship business as owners but not with 
any definite employment for the vessels which they own. Their 
vessels are for hire and will enter any trade for which they are 
adapted as the commercial demand requires. These vessels are 
known as "tramps" and the document setting forth the contract 
by which the vessel is rented is the '' charter party." Two general 
forms of charter party exist, but there are many modifications 
of these general forms. Under the first and more common form, 
the vessel owner hires his vessel to the charterer for a definite 
period or for a described voyage at a determined rate of com- 
pensation, the charterer to have the entire use of the vessel, but 
the owner to operate and be responsible for the conduct of it. 
Under the second general form of charter, the owner transfers 



52 MARINE INSURANCE 

his vessel as a bare ship, that is without captain, crew, fuel or 
provisions, to the charterer upon whom falls the entire burden 
of the operation of the vessel and the entire responsibility 
for the preservation and safety of it. By a "bare boat" charter 
as it is known, the owner transfers to the charterer everything 
but the legal title to the vessel. 

Forms of Charters. — As a general rule vessels are chartered 
for one of two purposes. The charterer may be engaged in some 
specific line of trade where vessel space in large quantities is 
needed as in the shipment of bulk cargoes such as grain, coal or of 
baled or bagged goods such as cotton, coffee or sugar. For these 
cargoes the merchant could not rely on obtaining sufficient space 
on liners and so through vessel brokers who are in touch with the 
freight markets of the world he will engage one or more entu-e 
ships either on a basis of payment of so much a day, so much a 
voyage, or so much a unit of cargo carried. Such charters are 
made in various forms, each particular trade having a special 
form, some associations of merchants engaged in the same trade 
having standard forms for the chartering of vessels for their 
particular trade. The second general reason for chartering a 
vessel, will be the necessity of a line operating vessels over 
definite routes requiring additional tonnage. In many cases 
where a line charters a ship, especially if it be a long time charter, 
the vessel will be taken over on the bare boat form. During the 
world war much of the chartering done by the governments was 
on the bare boat form. 

The Bill of Lading. — This naturally leads to a consideration of 
the bill of lading. If the vessel owner or the charterer ''puts 
his vessel on the berth" as it is known, to load cargo for whomso- 
ever may offer it for transportation, he must receipt for the goods 
which he accepts for carriage setting forth in this document 
the rate of freight and the terms and conditions under which the 
property will be carried. This receipt is called the bill of lading, 
which in its many forms is basically a document older by far 
than the marine insurance poUcy and is said to have changed 
little in 2000 years. It contains a mass of terms and conditions 
usually printed in such small type as to make the reading of 
it a difiicult operation. These clauses are the result of years of 
legal adjudication and have been added to from time to time 



commerciaIj geography 63 

usually in an effort to lessen the liability of the ship owner or 
charterer. It may be said as a general proposition that the 
ordinary bill of lading is so worded as to relieve carriers from all 
Qbhgations except those which the law insists that they shall 
retain. As decisions have been rendered holding carriers Uable 
for this or that risk to which the goods may be subject, the car- 
riers have so far as law permitted inserted new words adding such 
risk to the Ust of exceptions contained in the bill of lading. In 
most countries water carriers have been relieved by statute 
of many of their common law obligations, whereas land carriers 
are as a rule still held to a high degree of responsibility for prop- 
erty in their custody. 

Bill of Lading a Contract of Carriage. — The bill of lading is the 
contract of carriage, wherein the master of the vessel or the owner 
or agent, not only receipts for the goods, but also agrees to carry 
them to the port or place named and deliver them in the same 
condition imless prevented by one or more of the long list of 
excepted causes. In the bill of lading are noted the marks and 
numbers of the packages received, they being receipted for iq 
*' apparent '' good order. If, however, any unusual condition of 
the package be observed, as moisture or breakage, a note is made 
of this to prevent claim being made on the vessel at destination 
for the improper condition of the package. The docmnent also 
calls for deUvery to some named individual or firm or the goods 

may be consigned simply "to order" notify . 

The bill of ladiug thus takes on the character of a quasi-negotiable 
Lnstrimient and by endorsement passes title to the property 
which it represents. This negotiabiUty is necessary, of course, if 
the commercial set is to serve its purpose in trade. 

Liability of Carrier Determined by Bill of Lading.— The bill 
of lading serves a further purpose in that it determines the 
respective responsibilities of the carrier and the shipper and 
consignee, enabling the owner of the goods to arrange insurance 
against the risks excepted in the bill of lading, in so far as under- 
writers will assume Uability therefor. In early forms of "lad- 
ings" carriers assimied responsibiUty for practically everything 
except the Acts of God, the Kings' Enemies and Perils of the Sea. 
Underwriters generally accepted these risks so that the owner 
of the goods could fully protect himself against all liabilities 



54 MARINE INSURANCE 

other than the minor damages excepted in insurance policies. 
With the adding of exceptions in the bill of lading and with the 
unwillingness of underwriters to assume responsibility for all the 
excepted risks, it is not always possible at the present time for a 
merchant to relieve himself of all risks to which the goods may be 
subject during transportation. 

The Manifest. — In connection with the bill of lading may be 
mentioned the manifest which is a ship's docmnent giving in 
brief a list and description of all the property for which the 
vessel has issued bills of lading, showing shippers or consignees' 
names or initials, marks and numbers, and other descriptive 
information. This document is of great value in determining 
whether or not packages of goods are actually on board a vessel 
when the hill of lading is not available. Bills of ladings are 
usually issued in original, duplicate and triplicate and several 
non-negotiable copies may be issued if required. Additional 
copies of the manifest are also made, so that in the event of 
disaster, particulars of the vessel's cargo may be quickly ob- 
tained. A copy of the manifest is also lodged in the custom 
house, and another copy is on board the vessel to present to the 
custom or port authorities at the port of destination. 

The Marine Insurance Policy or Certificate. — The marine 
insurance poUcy is the document which makes possible commer- 
cial transactions on a basis of credit rather than by the actual 
exchange of goods or money. Marine insurance may be arranged 
specially for each individual transaction, but it is more usual 
for merchants to negotiate in advance with underwriters for a 
contract which will protect all their shipments made within a 
specified time or over definitely described commercial routes. 
These contracts are known as open policies, and the assured is 
usually given the privilege of issuing under such policies, on 
specially prepared forms embodying the salient conditions of the 
insurance policy, certificates of insurance. These documents 
certify that there has been insured with the named insiu*ance 
company in the name of the assured, so many packages of goods 
marked and niunbered as indicated in the margin for a specified 
amount of money, by named or described conveyances from the 
point of shipment to the point of destination, against the perils 
enumerated therein or in the parent policy to which reference 



COMMERCIAL GEOGRAPHY 



66 



No.?. 7P.^ 



CERTIFICATE OF THE 



$.gfiO.QDJ_ . 



J?teto §orli ifHarine 3nsurame Company 



TVS BcvntoB lAwa or o«iAt mka"* jutqnu' 

TMAT TWt CSmnCMB H tTAIIVBB WITHIM TBI 

DAVs Am* aacciTT m m ummt uncttoM. oran- 
WM uiM<cunier n oouacno mux. sooi 
n*Mn w ^ At m urmk or ixc amvup. 



OF NEW YORK 



New York, .^ JS3HU ARY-16t li. 



191 .9_, 



tna a to Certitp, That Ton th« ^Slth day of._JAl!DiBl 191 9_ 

there was insured with this Company unddr Policy lio.JZ31Z^(oT^.99?^S9.:'S^^\^^)*I.^^: 

JglHMY*giy-g TH0P3AHD OOAOO^-'^^^-------^----^^^^ 

«i -L!!L:r_-sjt -i!5lOQ-rj5L2»- -^^^ of Cotton valued at sum insured, 

pcr_TKAa ■ & -PAOIJXC-RAILWAY- 

at and from-^LBILBIIB t-TSX* 



to mnr-jORT.KAjia and at. juo). 



THKNCT-Jn LIYKRPOOTi. HUQm. 



TMt c«rliScat« rapraMatt tad takai Qm place of Uia. PsUcy, tad coavtjr* ail the ligkti of the OrifiBal Policy-holder (for the 
fpr p n t of e^octiac aay loee or elaiaw), m fully u If tbo property were cororod by a Special Policy direct to the holder of fhii Ceftiacate« 
■ad free froai aay KaUUty for aapaid praatiuau. 

Cox & Co. 



loait if aay, payable t». 



•f order, at the oflee of_ 



Banks & Co. 



., Loadoa^ Xaglaad,up«a the avrroador to them of thia CortiScate, coBpated at the ciureat 



ffito of oiebaate oa the day of payneat aad whoa eo paid liability vader ttia iaearaaco la diacharcod. 



CLAUSES 

To pey pArtleubr cvenae oa cacb (en bain u if wpintcly intufcd, H ■mottating (o three per cent., ualetft olherwiae 
acrecd. UM on ihipmcBU to Eurape to pay sea damace pickinsi cUaw witbout iciHcacc to ictits or amount. Ccneiit Avcrace 
iad Salvaa* Charget payable according to Fofcign SUIcmcot or per Yotk-Aatwcrp Relra if in accordance wHb tl)c cootiact ti 
aUnUbintnt. 

Inehidini tba riik of countnr dania«c on ihipinanti iaMrad hemmder W £iiiap'. Japan. China, India, or Manila, wibiect to 
MtllmwM at deftination namod m the certificUc or declantion, in accocdaiM«%ith ciMtooM aad onifaB at the port <A detlmation 
eeka otbcrwiM ipedficd in certificate with the caneaot o( thia compaoy but no claim (or loa o(. or damage to, couoa piciicd 
or itcondi ti coed a lite Unitrd State*, noc for any coat or expanae m rcvaet of foch picking or ncooditioniiv ahall be 
MCOvcnUe hereunder. Country damage i* not covered on "coat and freight" thipoicata nor h>cal tale*, not on tLipaieDlt to 
peiata In the Unltad State* or Canada, nor to porta ia Mexke, South or Ccniial Amarica or Rouia. 

Warraatad by tlie aaaured free fiom loa* or cxpeme arising from capture, leiaure, aneet. rertraiat? detention, or dealruction. 
■nd tlie comeiqnenrri thereof, or of any attempt thrieat aad alio from all comoquonoe* e< inmrrectiont, boatimiaa or warlike 
opetalioa*, Whether before or after deciaialion of war; aad whether lawful or unlawful and whether by tlie act of any belligerent 
■alion*, or . by eovemaients o4 aeeoding or revolting uatea. or by uaauthoriied or lawlaes penens thertm, or otherwite; and 
whMhar occainag in a port of diftma or otherwise. Abo warranted not to abandon in caa* of Ueckade, and free from any 
CipeM* hi " c o w a q ii cnc e thereof, but in the event of blockade to b( at liberty (o procaed to aay open port aad there end the 
vayage. It la alao agreed (hat the property be warraaied by the aawucd free from aay chuge, oaaiiae or loai, whkh may arise 
la coaetgnence of a leinro or detaatioa for. or on account of any Uicit or pmhibitad timda, or any trade in article* contraband 
«< war. or the vioUtioD of any pert regulatien. Also wartaaled frrc of loia or daoage cauiad fay iliften, locked out wor t nwn 
i taking part ia bber dislarfaaac** or riot* or civil commotiou. 



HaU coveitd, at a premium to be arranged, in case of deviation or ckaage of voyage withfai the Jimit* of this policy, or 

rfer tn Wkcr approved cteaowrs, provided nobce be given to tbe aiauren aa sooa aa uowa to tba aiaurad. 

Wanaatad bgr the assured that they will aol leJievc aay carrier or other bailee from aay statutory or commoo law liability 



Wanaated not to cover tbe interest of any partnership, corporatioB, aisoriatioa, or penon, insurance for whose aocooat would 
bk ceattary to tbe Tradiag with the Enemy Act* or other Metute* or piebibltioo* of the United States and/or British Govcmmcntv 

In the event of iota or damage to the property insured hereunder, proof* of loss will bo aftthaaticatod on appUcatioo to 
eat of the Cenpaagr'* repreaeauttve* as named on the back of tUs certttcate. 

AH itwarancao wlilcli by oitdoraament beraon in accordance with tlie tarnna and condition* of thia policy 
litclisde rMi aftar dlacharge at foreign port of destination and until dellvored to warehotiae or railway car or 
aiin by railway or other land convoyancoa contemplate throtigh tranalt with cuatemary doapatch. 

In caao detlvory to warehowae or mill U stopped or delayed by order of the aaaured, or the agent of the 
aienred, the rUk heratindor ehall theretipon terminate. 



Marks aad If vmben 



TSR 100 



Not valid unless countersigned by Cox & COv 
Ctm$itert^ned 




^fc^ CAySli^ P reridert. 



66 MARINE INSURANCE 

is made. The important point, however, in the present connec- 
tion is that the certificate goes on to state that loss, if any, is 
payable to X.Y.Z. or order at a named place and if a certificate 
is payable abroad at a fixed or determinable rate of exchange. 
This document, like the bill of lading, thus becomes a quasi- 
n^otiable instrument and becomes available to the holder thereof 
to whom it has been transferred in good faith. The holder of 
the certificate, however, takes the document subject to any 
liability there may be on the part of the original assured for 
unpaid premiums, unless indeed by special clause in the cer- 
tificate the imderwriter waives his claim for premium against 
third parties. These certificates of insurance provide for pay- 
ment in all parts of the commercial world and when issued by 
responsible underwriters are accepted at their face value in all 
the banking centers of the world. 

The Symbols of Ownership. — The merchant who has made a 
shipment of goods has at this point three documents. First an 
invoice showing the purchase price of the goods sold. Second a 
bill of lading indicating that the goods described in the invoice 
have been shipped and are in the possession of a common carrier 
on their way to the buyer. Third, an insurance certificate certi- 
fying that these goods are insured as specified against the perils 
of transportation. He thus has parted with his property and 
has in place thereof certain documents which will entitle him or 
the legal holder thereof to the property at destination or in the 
event of its damage or loss to recompense by insurance. This, 
however, from the merchant's point of view is but one of many 
transactions of a similar nature in which he is involved, and he is 
primarily interested in receiving payment for the goods sold and 
getting out of the transaction. 

The Draft or Bill of Exchange. — When making a contract of 
sale arrangements are made between buyer and seller regarding 
the method and terms of payment. In overseas trade this is 
usually arranged by draft payable on sight or a definite number of 
days, 30, 60 or 90, as the case may be, after sight or presentation 
of the draft, accompanied by invoice, bill of lading and insurance 
certificate. The seller of the goods has banking connections who 
have agreed to buy his drafts or to accept them for collection. 
The merchant accordingly -having made his invoice, obtained the 



COMMERCIAL GEOGRAPHY 57 

bill of lading and insurance certificate, draws a draft on the 
purchaser in the following form: 

FIRST 
No. 1128 
£6000. Abilene, Tex. Feb. 15, 1919. 

Thirty days after sight of this First of Exchange (Second Unpaid) 
Pay to the order of COX & CO. Five Thousand Pounds Sterling, value 
received and charge same to account of 
(100 Bales Cotton T S R). 

COX & CO. 
To— JAMES TURNBULL & CO. 
London, England. 

Endorsing the draft in blank and attaching it to the other three 
documents, the bill of lading and insurance certificate having been 
endorsed in blank, he presents the commercial set to his bankers 
who put the draft in process of collection, and set up as a credit 
to the seller the whole or a part of the amount for which the 
draft is drawn. The merchant is now in funds and is practically 
out of the transaction. 

Method of Collection of Draft. — ^The process of the collection 
of this draft which we will assume represents payment for a ship- 
ment of 100 bales of cotton marked T S R by Cox & Co. Abilene, 
Tex., to James Turnbull & Co., London, England, will serve to 
illustrate how an overseas shipment is made and financed and the 
important part marine insurance plays in these transactions. 
The Farmers & Merchants Bank at Fort Worth with whom 
Cox & Co. do their banking and which has accepted the draft for 
the 100 bales of cotton is merely a so-called country bank and does 
its banking with a larger bank at New Orleans to which it passes 
on this commercial paper, and in turn receives credit for the 
amount advanced. The New Orleans Bank is a correspondent 
of a New York Bank to which it sends this commercial paper for 
collection and receives credit therefor at the New York Bank. 
In London the New York Bank has a correspondent to which it 
sends the documents and this bank sends its representative 
to James Turnbull & Co. with the documents. They carefully 
examine them to see that the shipment against which the draft 
is drawn corresponds with the contract of sale into which they 



58 MARINE INSURANCE 

have entered with Cox & Co., and if it does they write across the 
face of the draft, 

Accepted Mar. 15, 1919. 
Payable at Security Bank. 

and sign their name. The documents which are the symbols of 
the goods are retained by the bank which presented the draft 
for acceptance. Assuming that the bill is payable 30 days after 
sight, this means that 30 days from Mar. 15, 1919 or on April 
17, 1919, three days of grace usually being granted, the holding 
bank will present the draft at the Security Bank for payment 
and James Turnbull & Co.'s account will be charged with the 
amount and the bill of lading, insurance certificate and invoice 
will be delivered over to them. K James Turnbull & Co. so 
desire they may discount the bill when presented for acceptance 
or at any time prior to the due date. If the 100 bales of cotton 
arrive prior to the due date they will probably wish to discount 
the biQ in order to obtain the documents and so obtain delivery 
of the goods upon the surrender of the bill of lading. The draft 
having been actually paid by James Turnbull & Co. the trans- 
action is completed and the credits, set up in the various banks 
through which the documents have passed, are confirmed. 
If James Turnbull & Co.'s credit is high the shipping documents 
may be surrendered to them when they accept the draft. 

Trading in Bills of Exchange. — It may be that Cox & Co., 
instead of depositing their documents with their local bankers at 
Abilene will send them on to New York City to some bill broker. 
These biU brokers deal in conamercial paper, just as stock brokers 
deal in stocks and bonds. If Cox & Co.'s financial and moral 
reputation is high this bill broker will buy their commercial 
paper at the prevailing rate for exchange on London and they will 
receive credit in full for the amount of the draft and will be ab- 
solutely out of the transaction, except under their liability as the 
drawer and/or endorser of the bill in the event of its non-accept- 
ance by the drawee. The bill broker in turn sells this exchange 
to a bank which sends the draft on to London for collection, where 
the process of acceptance and payment is conducted as outlined 
above. Bankers in bu3ang commercial paper carefully examine 
the documents, paying especial attention to the insurance certi- 



COMMERCIAL GEOGRAPHY 59 

ficate to see that it is in proper form and that the company or 
underwriter with whom the insurance is placed is one whose 
security can be accepted safely. 

Letters of Credit. — ^The foregoing description of the use of the 
commercial set is merely an outline and does not attempt to go 
into the details of these transactions. A similar process is 
involved when shipments are made under letters of credit. . In 
such cases the buyer purchases a letter of credit from his bank, 
by virtue of which there is estabUshed m some foreign banking 
center a fund to the credit of the buyer, against which he may 
authorize the seller to draw drafts for goods purchased by the 
buyer.- The seller draws the draft, attaches the invoice and bill 
of lading thereto and presents it to the firm or bank in whose 
favor the letter of credit is issued. They accept and pay the draft 
charging the amoimt so paid against the letter of credit. In 
such cases, it is usual for the buyer to have an open policy of 
insurance payable to the bank issuing the letter of credit, which 
covers all shipments made under such credit, so that no insur- 
ance certificate is attached to the commercial set. The invoice, 
however, indicates that the terms of sale provide for buyer's 
insurance and the sale is one made on cost or cost and freight 
terms already described. 

The Balance of Trade. — These transactions in their various 
forms estabUsh the basis of international trade and credit. 
Countless in number it will readily be seen that there are always 
in the banking centers of the world large amounts of commercial 
paper drawn on foreign citizens which eventually must be paid. 
The large banks in the great commercial centers of the world run 
debit and credit accounts with each other, a New York bank 
crediting itself with commercial paper which it sends to its 
London correspondent for collection and debiting itself with 
paper drawn on American firms sent to it by its London corre- 
spondent for collection. This process of debiting and crediting 
will continue on each side until the balance of trade becomes so 
much in favor of one country that there are not sufficient credits 
held by all bankers in that country, to offset the debits against 
the bankers in another country. To again establish the financial 
equiUbrium it is necessary for the debtor nation to ship gold to 
the creditor nation and so again restore the balance of trade. 



60 MARINE INSURANCE 

Here again marine insurance is called into aid, for without insur- 
ance the gold will not be shipped. 

Goods the Basis of Exchange. — It must not be supposed from 
this general description of the process of financing overseas ship- 
ments, that all drafts are accompanied by shipping documents. 
It is maintained, however, that underlying the major portion of 
bills of exchange there is the buying and selUng of goods and it is 
because of the existence of the goods and of the negotiable docu- 
ments which represent the goods that the transference of credits 
by the biU of exchange or draft is possible. Banking, transporta- 
tion and insurance are a trinity so closely interwoven one with 
the other that neither is of much use dissociated from the other 
two. 



CHAPTER 3 
SHIPS AND SHn>BUn.DING 

A Vessel the Basis of all Marine Insurance. — Every marine 
insurance transaction involves some type of vessel. Whether 
the insinrance be on hull, freight or cargo, there is a vessel as the 
base of the insurance, and whether the risk is a good one or a bad 
one from the underwriting point of view depends largely on the 
character and condition of the vessel. Marine insurance is 
general in its application. From the slow man-propelled canoe 
of the Indian on the upper reaches of the Amazon Eiver, up 
through all the intermediate stages to the colossal ocean grey 
hound driven through the waves at a tremendous rate of speed 
by the propelling power of the latest type of turbine engine, 
marine insurance plays its part in assuming the hazards of naviga- 
tion and in distributing losses over the whole consuming public. 
It therefore becomes essential before attempting any general 
discussion of the principles of marine insurance to obtain some 
general idea of vessels, their types, their structural qualities with 
respect to the natural forces with which they must contend and 
of their suitabiUty as carriers of the many and varied commodities 
with which transportation has to deal. 

Mediums Used in Construction of Vessels. — Perhaps the best 
avenue of approach to this subject is to consider first the mediums 
which are used in the construction of vessels. These are in 
general four in number, i.e., (1) wood; (2) wood and metal known 
as composite vessels; (3) metal and (4) the new and experimental 
mediiun of reinforced concrete. Vessels may again be considered 
from the viewpoint of their propelling power. First, of course, 
we find the man-propelled vessel, now fast disappearing except 
among the most primitive tribes; second, vessels propelled by 
the wind; third, those whose motive power is purely mechanical; 
fourth, vessels propelled by a combination of wind and mechan- 
ical power which are known as auxiliary vessels, and, fifth, vessels 
without motive power such as harbor barges. 
6 61 



62. MARINE INSURANCE 

Wooden Ships. Difficulties in Construction. — ^Wood was the 
original material from which large sailing vessels were built. 
This type of ship may, roughly, be divided into two classes, the 
square rigged and the schooner or fore-and-aft rigged types. 
Among the square-rigged vessels are found barks, barkentines, 
brigs and full-rigged ships, each named from its special type of 
masts and sails, and each possessing its peculiar advantages in 
connection with certain routes of trade. The square-rigged ves- 
sel has, to a considerable degree, given way to the simpler form of 
fore-and-aft rigged schooner. In this latter type it is less difficult 
to manipulate the sails. Mechanical power is frequently used in 
raising and lowering the sails of the schooner rigged vessels, thus 
materially reducing the cost of operation. The schooner type 
may again be subdivided into classes according to the number of 
masts with which the vessel is equipped, the rigging of the vessel 
being determined to a large extent by the trade for which it is 
designed. In connection with the construction of wooden 
vessels, whether for sail or steam power, it should be borne in 
mind that beyond a certain length, say 200 feet, it becomes 
increasingly difficult to so fasten the parts of a vessel together that 
it will be able to withstand the severe strains to which it will be 
subjected when exposed to ocean storms. Furthermore the in- 
crease in the number of masts, with the consequent added sail 
area, or the enlargement of the propelling machinery used to 
develop high speed, subject the vessel to unusual stresses. These 
stresses have so strained vessels in many cases that seams have 
opened up permitting water to enter and damage cargo and fre- 
quently have caused the whole hull structure to be thrown out 
of ahgnment. This is particularly the case when vessels con- 
structed for a certain trade are transferred to more difficult 
routes for which they are not designed. 

Green Wood and Its Effect. — Another very serious difficulty 
encountered at the present time in the construction of wooden 
vessels is that of green wood. The unusual demand for tonnage 
has exhausted the supply of seasoned wood for shipbuilding pur- 
poses and trees are being felled, sawed into shape and built into 
the structure of the vessel without being properly cured. This 
wood being green will gradually dry out, shrink and open up 
the seams of the vessel. In the case of engine driven wooden 



SHIPS AND SHIPBUILDING 63 

vessels this gradual shrinkage may so weaken the vessel that 
the machinery will be thrown out of alignment, causing serious 
engine trouble. Then again before the war wooden shipbuilding 
had become more or less of a lost art and there were comparatively 
few skilled wooden ship carpenters. The combination of these 
physical and human difficulties has resulted in a number of 
wooden vessels encountering serious difficulties soon after they 
were put into service. 

The Fastenings of Wooden Vessels. — Not the least of the 
problems the wooden ship builder has to meet is that of fasten- 
ing the various component parts of the vessel into one harmonious 
whole. As already suggested this problem becomes more diffi- 
cult as the length of the vessel is increased and the sail or engine 
equipment enlarged. The amount of wind pressure exerted 
against the sails of a five- or six-masted vessel is enormous even 
in moderate weather, and when atmospheric conditions produce 
storms, unless such vessels have sufficient metal and wooden 
fastenings (treenails) something wiU give under the strain with 
consequent loss of life and property. Not a few of the wooden 
vessels launched within recent months have after their first trip 
been returned to the shipyards for the insertion of additional 
material and the refastening of the whole structure. When it is 
remembered that every additional ton in the weight of the vessel 
itself reduces its carrying capacity one ton with a consequent loss 
of earning power, a motive will be seen for light construction. 

Composite Ships. — During the decline of the wooden vessel 
in the second half of the nineteenth century and before the metal 
ship had come into its own, there were produced composite 
ships built partly of wood and partly of metal. In these ves- 
sels the usual construction called for a metal frame work and 
deck beams with wooden sheathing and decks. Vessels of this 
type of construction are not built commercially at the present 
time, although the United States Government included a few 
steamers of this type in its shipbuilding program. A few of 
the old composite ships are still operated on the Great Lakes 
and here and there vessels of this type will still be found in active 
service. 

Steel Vessels. — Steel has taken the leading place among ship- 
building materials. When metal ships were first introduced 



64 MARINE INSURANCE 

iron was used almost exclusively. With the development of the 
iron industry and the production of new forms of the metal it 
was found that steel lent itself more readily to the construction 
of the hull itself and contained qualities which offered better 
resistance and accommodation to the various stresses and strains 
to which the structure was subjected when the vessel was in 
operation. Iron, however, offers more resistance to the corrosive 
action of sea water and some of the old iron sailing ships built 
thirty or forty years ago are still in service, their hulls tight and 
sound after their long and arduous careers. England was the 
pioneer nation in the development of the steel vessel and it is 
to this fact that her leadership in the overseas carrying trade may, 
in no small measure, be attributed. 

The Marine Engine. — The construction of the metal vessels 
naturally led to the development of the marine engine. Steamers 
have been in operation for many years, the side or stern paddle 
wheel type of engme first being used. This system of propulsion 
was not well adapted to the severe storms encountered on the 
oceans, and the screw propeller came into use. Since the adop- 
tion of this method of applying the power generated by the en- 
gines, the development of the steamer has been rather one of 
form than of method. How great this progress has been, will 
appear from a comparison of the first Cunard Liner with the 
modern ocean greyhound. 

Liners and Tramps. — Experience quickly revealed defects 
both in huU and engine construction and the story of steel 
shipbuilding is one of constant improvement. Various types 
of construction have been devised to meet the needs of the vary- 
ing conditions found in the different commercial trades, but m a 
very general way steel steam vessels may be grouped under two 
heads, the liner and the tramp. The Uner is designed for speed 
primarily, the tramp for utility. The modem leviathan would 
be a commercial failure were the traveUng public not willing to 
pay large amounts of passage money for the extra speed, comfort 
and luxury which these steamers afford. So much room is 
occupied by passenger, engine and bunker accommodation that 
little cargo space remains. In the modern tramp steamer on the 
other hand, cargo space is the primary object and speed becomes 
a secondary consideration. In the building of the tramp steamer, 



SHIPS AND SHIPBUILDING 65 

and it is with this type that marine insurance in chiefly concerned, 
the endeavor is to produce as large a vessel as is practicable, 
considering the routes of trade for which it is designed, the size 
of the harbors which will be used and the possibility of obtaining 
cargoes suflSciently large to occupy the cargo space provided. 
It is considerably cheaper to build one large tramp steamer than 
it would be to build four small ones of equal aggregate carrying 
capacity. It is also much cheaper from the viewpoints of both 
fuel and crew to operate the large vessel than it would be to operate 
the four small ones. However, if the large vessel cannot obtain 
full cargoes or if her size restricts her use to a few harbors or to a 
few trades which are relatively unprofitable, the vessel will be a 
commercial failure. It will be demonstrated later on that every 
additional ton of weight in the structure of the vessel itself re- 
duces the weight of the cargo to be carried by one ton. Hence, 
the principal consideration in the building of the tramp or cargo 
steamer is the reduction of the vessel weight to the point where 
all the requirements of safety have been met, but where all 
unnecessary parts have been eliminated. The endeavor is also 
made to so design the shape of the vessel that the maximum of 
cargo space is provided with the minimimi retardation of speed. 
Longitudinal Framing. — Perhaps the greatest advance in this 
direction in recent years has been the invention of a practical 
system of longitudinal framing. This system, known as the 
"Isherwood System" after the name of the inventor, reduces the 
weight of the material in the ship itself without any loss of 
strength and at the same time increases the cargo space. Under 
the older system of transverse framing, the frames were placed 
so close together that it was impossible to stow the ordinary 
cargo in between them. In the longitudinal system, the trans- 
verse framing is replaced by great transverse bands which under- 
gird the body of the vessel, placed at intervals of twelve to twenty 
feet. In them are notches in which are set longitudinal frames 
to which the steel plating is riveted. In between these frames 
cargo can be placed against the side of the ship or against 
the cargo battens, thus greatly increasing the capacity for a Ught 
cargo such as cotton. For heavy dense cargoes the capacity is 
also increased as the weight of the vessel itself is reduced. This 
design of construction has lent itself successfully to all types of. 



66 MARINE INSURANCE 

shipbuilding, both sail and steam and is used, not only in the 
building of bulk carriers but also in the construction of Hners. 

Bulk Cargo Carriers. — The carrying of bulk cargoes presents 
various difficulties and special types of vessels have been devised 
to meet the peculiar conditions created by the overseas trade 
in such commodities. The tendency of grain and coal cargoes 
to shift and to render a steamer unstable has led to the production 
of so-called self-trimming steamers, a type of which is seen in the 
topside tank bulk carriers. The carrying of petroleum in bulk 
has produced problems which are successfully met in the modern 
tank steamer. On the other hand the use of crude oil as a fuel has 
created new problems especially from the underwriting point of 
view. Fuel oil is ordinarily carried in the ballast tanks or the 
double bottom of a steamer. H the vessel grounds and injures 
her bottom so that repairs must be made, the fuel oil is necessarily 
drawn out. Before mechanics can safely enter the tanks, how- 
ever, they must be thoroughly cleansed and a chemical test made 
for poisonous gas. This process is one entailing great expense 
and only recently has been brought to the attention of hull 
underwriters. 

The Self -trimming Vessel. — New types of ships are produced 
in an endeavor to meet special needs. Within the last two 
years a self-trimming ship, equipped with small unloading ele- 
vators has made its appearance. This is an entirely new type 
of vessel designed to afford quick despatch in the unloading of 
bulk cargoes of grain, ore, or coal. Self trimming in design, 
there is laid at the bottom of the ship in long chambers running 
the length of the vessel, a miniature railway on which run small 
cars. These are loaded through chutes at the bottom of the 
holds, and are drawn to the elevator wells. They are then lifted 
up above the deck and their contents dumped through discharge 
pipes into receiving barges or onto the discharging dock. This 
type of vessel was designed by the ItaUans and the first vessel 
produced, the Str. "Milazzo" had a short but eventful career. 
Loaded with a general cargo, the vessel took fire in her cotton 
cargo, the fire spreading to barrels of oU in the bottom of the 
hold. The burning oil, floating on the water which was poured 
into the hold to extinguish the fire, found its way along the rail- 
way trunk to the openings into adjoining holds, thus communicat- 



SHIPS AND SHIPBUILDING 67 

ing the fire to the rest of the ship. The fire was extinguished 
but not until great damage was done and after temporary repairs 
at the Azores, the ship reached her Itahan port of destination, 
where permanent repairs were made. But ill-luck pursued her for 
soon after reentering commercial service she was sunk by a 
submarine. The case of the Milazzo is especially interesting 
from the point of view of marine insurance in that it indicates 
how new types of vessels produce new problems and create 
unsuspected hazards for the underwriter. 

Concrete Ships. — ^Doubtless the most interesting experiment 
of the present time in the realm of shipbuilding is the concrete 
ship. Successfully used in all forms of construction, reinforced 
concrete is now being experimented with as a medium for pro- 
ducing ocean going mechanically propelled vessels. Its sponsors 
claim for it all the virtues of other construction materials, and 
in addition point out the ease, speed and economy of building. 
Being a new form of construction it will have to live down the 
natural prejudice against stone vessels, even. as the ship built 
of metal, which it was said would not float, had to overcome the 
prejudice of seventy-five years ago. Time and experience alone 
will prove the worth of this form of construction. Small steam- 
ers and harbor boats have been successfully built of this material 
and are in practical operation in Norway, Holland, England and 
Italy. 

Lake Vessels. — ^The lake type of vessel is worthy of notice, 
since a considerable portion of American marine insurance 
premiums are derived from these vessels and their cargoes. 
Built for quick loading and discharging, with many large hatches, 
and with engines located in the after end of the vessel, a dis- 
tinctive type of steamer has been developed. Operated in fresh 
water, these vessels are furnished, in many cases, with fresh water 
engine equipment. They are of comparatively light construction 
as they do not encounter, except on rare occasions, storms of 
the severity of those experienced on the oceans. These vessels 
are admirably adapted for their particular service, but when 
transferred to ocean trade, as has been common in the last few 
years, they have occasioned much loss of life and property. 
Only by the rebuilding and refitting of these vessels can they be 
made fit for ocean trade, and even then they are suitable for 



68 MARINE INSURANCE 

only the least hazardous coastwise service. The distinction 
should be observed, however, between steamers built for lake 
service and lake-built steamers for ocean service. Many of the 
Great Lakes shipbuilding yards are now producing steamers 
suitable in all respects for ocean operation. 

River and Harbor Craft. — The various types of river and 
harbor craft are worthy of notice and study. Each serves a 
particular purpose and produces its own peculiar problems. 
The opening of the new Erie canal will doubtless produce new 
types of ocean going barges capable of carrying bulk cargoes 
down the lakes, through the canal and up and down the coast 
without breaking bulk. The commercial world stands on the 
threshold of a new era and shipbuilding in America occupies no 
small part in the newly awakened commercial life. 

Types of Marine Engines. — The motive power of vessels is 
also worthy of study by those who would be proficient in marine 
insurance. The reciprocating engine has given way in part to 
the turbine tjrpe, and now with the perfecting of the internal 
combustion engine there has been opened up an entirely new 
field of power design. These internal combustion engines are 
being adapted to use in the largest vessels, with a resultant 
saving in cargo space and economy in operation, which are two 
factors of the first importance in profitable ship owning. How- 
ever, as with all other new devices, the marine underwriter 
pays dearly for his experience. While the new forms of internal 
combustion engine^ may be mechanically successful, the marine 
underwriter has discovered, to his cost, that an engineer proficient 
in the operation of a steam engine, may be a failure as the con- 
troller of the highly sensitive oil engine. Here, again, practice 
will make perfect and the internal combustion engine will no 
doubt emerge from its experimental stage, a practical and effi- 
cient marine engine. 

Why Does a Vessel Float? — It is not alone desirable that some 
knowledge of the types of vessels be had, but it is also important 
that at least a theoretical knowledge be acquired of the natu- 
ral laws which make it possible for a vessel, built of a material 
heavier than water and loaded with a full cargo, to float. 
Whether or not a ship when ready for sea is seaworthy depends 
not a little on her loading and stability. How much cargo a 



SHIPS AND SHIPBUILDING 69 

vessel can safely carry and how that cargo must be loaded in order 
to produce a stable ship are questions which involve many difficul- 
ties and can be satisfactorily answered by only those who are 
expert in such matters. But underwriters and shippers may 
obtain some idea of the underlying principles of these subjects, 
sufficient at least to enable them to ask intelligent questions of 
experts. 

Displacement. — ^Displacement is the name given to the actual 
weight of the ship when empty or of the ship, its stores and cargo 
when the vessel is fully loaded. It is measured by determining 
the weight of the mass of water displaced by the floating vessel, 
measured in cubic feet or in tons. A cubic foot of salt water 
weighs 64 pounds, thus thirty-five cubic feet exactly equal one 
long ton of 2240 pounds. It can be practically demonstrated that 
a tin watertight box one foot long, one foot wide and one foot 
high, measuring exactly one cubic foot and weighing one 
pound will float on the water. If, however, sixty-two pounds 
of weight are put in the box, it will almost submerge. If one 
pound more is added, making a total weight of 64 pounds the 
box will submerge. The sUghtest additional weight will cause 
the box to sink. The amount of water displaced by this sub- 
merged box is one cubic foot, and as its total weight is 64 pounds, 
it is fairly demonstrated that the displaced water also weighs 64 
pounds. The same fact could be proved by actually weighing 
one cubic foot of seawater. This being so, if the exact quantity 
of the water displaced by the ship could be measured in cubic 
feet and divided by 35 the weight of the ship in tons would be 
obtained. The formula for obtaining this weight or the dis- 
placement in tons is therefore. 

Length X Breadth X Immersed Depth (Draft) 

35 

Displacement Curve, — In the case of a cubical box as used in 
the foregoing illustration the application of the formula is a 
simple matter, but in the case of an irregular object such as a 
ship the figuring of displacement introduces many complications. 
To facilitate this process there has been devised what is known as 
a ** Displacement Curve" specially designed for each vessel which 
enables one to read off the displacement when the draft is known. 



70 MARINE INSURANCE 

A detailed explanation of how this curve is designed may be found 
in "Know Your Own Ship'' by Thomas Walton. The impor- 
tance of this ability to measure the weight of a vessel becomes 
apparent in the loading and discharging of cargo. The weight 
of a vessel being known in an imloaded condition from the dis- 
placement shown at that point in the " Displacement Curve," 
every inch increase in draft will indicate the number of tons 
weight loaded. Likewise, in the discharge of cargo or in the burn- 
ing of fuel each inch decrease in draft will indicate the weight of 
cargo discharged or of fuel consumed. The difference between 
the displacement of a vessel when light (unloaded) and the dis- 
placement fully loaded is the dead weight capacity. It will, 
of course, be noted in this connection, that if the ''Displacement 
Curve" is figured on the basis of sea water which offers a buoy- 
ancy of 64 pounds to the cubic foot, allowance must be made in 
the case of a vessel lying in a fresh water river where the buoyancy 
of the water will only be 623^ pounds to the cubic foot. 

When Will a Vessel Float? Buoyancy. — The question is 
naturally raised. What is buoyancy? and why does a vessel float? 
Buoyancy is the power to float. A vessel will float when its 
enclosed watertight volume is greater than its total weight 
(displacement) in tons multiplied by 35. The supporting pres- 
sure of water is all exerted vertically or obliquely and increases 
in proportion to the depth. At one foot depth there is 64 pounds 
pressure to the square foot, at two feet depth there is 128 pounds 
pressure to the square foot and so on. The pressure exerted 
horizontally is just as great proportionately, but has no lifting 
power. Thus in the illustration of the cubical tin box cited above, 
which was watertight and weighed one pound, it appeared that 
with 62 pounds weight therein the box woxild just float, but if more 
than one pound were added the box would sink. It should also 
be noted that once having become submerged the box would con- 
tinue to sink until it rested on the water bed, the increased lifting 
power at the lower depth being exactly offset by the downward 
pressure exerted by the weight of water above the box. Thus 
appljdng the same principle to a ship, it will float up to the point 
where its own weight, plus the dead weight contained in it, 
multiplied by 35 equals its enclosed watertight volume meas- 
ured in cubic feet. Of course, a vessel so loaded would not be 



SHIPS AND SHIPBUILDING 



71 



seaworthy, because the least additional weight as that of a wave 
breaking on the deck, would cause the vessel to sink and it would 
continue to sink until it rested on the ocean bed. For safety, 
it is essential that a considerable portion, say twenty-five percent, 
of her total dead-weight capacity be not used in order to provide 
a margin of safety, known as reserve buoyancy. 

Free-board and Load Lines. — This naturally leads to a con- 
sideration of free-board and load lines. The free-board of a 
vessel is the distance measured at the middle of the length of the 
ship from the top of the main or upper fully enclosed deck to the 



T 



StatDtory Deck Line 



Top of Deck at Side 




Ltt.> 



W.N.i 



Elevation 
Steel Ship 

water line. The free-board is the measure of the reserve buoy- 
ancy of the vessel. How great the free-board in any given ship 
should be is a matter of very careful measurement depending on 
its design and structural strength, and of the trade for which 
it is intended. Several foreign nations have prescribed definite 
rules for the calculation of free-board and require that vessels 
under their flags have a definite load line assigned. Credit for 
load line legislation rightfully belongs to Samuel Plimsoll, an 
Englishman, who after much educational work, impressed on the 
members of the English parUament that vessels were putting to 
sea dangerously loaded with consequent loss of life and property. 
Legislation was finally passed providing that all British vessels 
over a certain size should be measured for free-board and a 



72 MARINE INSURANCE 

» 

mark, now known as the ''Plimsoll Mark" cut in and painted on 
the side of each vessel at the middle of its length. 

The Plimsoll Mark.— The ''PUmsoU Mark" by the terms of 
the Act may be assigned by the Classification Societies such as 
Lloyd's, British Corporation or the Bureau Veritas and consists 
of two symbols as indicated in the accompanying diagram. 
All British ships, within the law, carry the disk as the mark in 
the left is known, and if loaded so that the horizontal line is 
submerged are overloaded and sailors are relieved of their 
obUgation to sail with such a vessel. If a ship is to be engaged 
in ocean or world-wide trade she may also carry the second symbol 
or the gridiron. This mark indicates five dififerent permissible 
load lines. The upper prong extending to the left and marked 
F.W. shows the depth to which the vessel may be loaded in a 
fresh water river, the increased buoyancy of the denser ocean 
water, lifting the vessel to the salt water marks shown on the 
right of the gridiron. These four prongs are marked L8. or 
Indian Summer the depth to which the vessel may load during the 
good season of weather on the run between Suez and Singapore, 
S. or the summer load Une, W. the winter load line, October 
to March both included, and W,N.A. a line allowing increased 
margin of safety for vessels operating in the North Atlantic 
during the boisterous winter season. 

The Advantages of a Load-line Law. — The load-line law of Great 
Britain does not necessarily prevent British vessels from being 
overloaded, but the law has the great advantage of permitting 
British sailors to appeal to the British Consul and be reUeved 
from saiUng with a ship that is overloaded. The United States 
Shipping Board is having the ''Plimsoll Mark" cut into steamers 
that are being built in this country for its account. There 
is up to the present no load-line legislation requiring that ships 
under the American flag have a fixed load Une, although such 
a bill is now before Congress. It would seem fitting that since 
vast amounts of American capital both private and public 
are being invested in the upbuilding of our Merchant Marine, 
that a load-line law should be passed, not only for the protection 
of American sailors and passengers on American ships, but also 
for the conservation of American tonnage, which may readily be 
lost through improper loading. 



SHIPS AND SHIPBUILDING 



73 



Stability. The Centers of Buoyancy and Gravity, — The 

seaworthiness of a vessel does not depend altogether on the depth 
to which it is loaded. The stability of the vessel is of equal 
importance- Stability may be defined as the abihty of a vessel 
to retain or regain a position of equiUbrimn. This abiUty de- 
pends on the design and loading of the vessel. In the considera- 
tion of the watertight tin box weighing one poimd and containing 
one cubic foot of watertight space, it was observed that any weight 
greater than 63 pounds sank the box. The cause of the sinking 
was that two forces, that of buoyancy and that of gravity had first 
become neutralized and then by the addition of the last pound of 
weight the force of gravity had overcome the force of buoyancy. 




Fig. 2. 



The forces of buoyancy meet at a point within a ship called the 
center of buoyancy. Where the forces of gravity meet is known 
as the center of gravity. If these two centers are in the same 
vertical plane the vessel will be in a state of equilibrium, the forces 
of gravity being exerted downward directly against the forces of 
buoyancy which are exerted upward. The stabiUty of the vessel 
depends on the relative positions of the two centers. The fact 
that these two forces are opposed one to the other, counter- 
balancing each other, explains why a vessel rests after rolling or 
pitching. 

Why a Vessel Rights after Rolling. — ^The action of buoyancy 
and gravity is illustrated in the above figures. The position of 
a vessel when in a state of rest is indicated in Figure 1 which 
shows the cross section of a vessel. WL is the waterUne, the 



74 MARINE INSURANCE 

point G the center of gravity, and the point B the center of 
buoyancy, the dotted line XY showing the median line of the 
cross section, indicating that the two centers are in the same 
vertical plane. Figure 2 shows the same cross section, the vessel 
having rolled with a wave. It will be observed that the center 
of gravity G remains stationary, provided the cargo does not 
shift, while the center of buoyancy B moves over toward the 
heeUng of the ship. This center moves because the immersed 
portion of the ship, that part below the new waterline TF'L' is 
of a different shape from the immersed portion in Figure 1, that 
part below the waterline TFL, and the center of buoyancy 
naturally is found where the forces of buoyancy meet in this new 
shape. The effect of the moving of the center of buoyancy is to 
throw out of line the center of the force of gravity (7, and the 
center of the force of buoyancy B, thus creating a lever of 
stability indicated by the line GZ in Figure 2. , This lever act- 
ing with a force measured in foot tons equivalent to the weight of 
the ship and its cargo in tons (displacement) multiplied by the 
length of the lever in feet, is exerted to draw the ship back to 
its original position. 

The Law of Inertia. — Of course, at this point the law of inertia 
enters. The tendency of the vessel is to continue to roll in 
the opposite direction until by the shifting of the center of 
buoyancy toward the new heeling of the ship, another lever is 
created, which pulls the ship back again. This movement will 
continue until the friction of the air and the water counteracts 
the force of the lever and the vessel will again come to a state of 
rest as in Figure 1. 

Shifted Cargoes. — In the loading of bulk cargoes such as grain, 
coal, ore or bulk oU great care is used to prevent the shifting 
of the cargoes during the rolling to which a vessel is subjected. 
If a cargo such as grain does shift with the rolling of the vessel 
the center of gravity will shift toward the heeling of the ship, 
and the vessel will right herself with a shortened lever of stability, 
only to the point where the two centers G and B are again in the 
same vertical plane. This will not of course be in the median 
line of the cross section but to one side of it, and the vessel will 
float with a list. In this position when buffetted by wind and 
wave the vessel will regain her listed position if no further cargo 



SHIPS AND SHIPBUILDING 75 

shift takes place, but if the cargo shifts further the righting lever 
GZ may become so short as to be powerless and the vessel will 
capsize. 

The Meta-center. Stiff and Tender Vessels. — Again referring 
to Figure 2 it will be noticed that the vertical line drawn through 
the new center of buoyancy B intersects the medium line Xy at 
a point Af . If the roll of the vessel does not exceed say fifteen 
degrees this point wiU remain the same for aU rolling less than 
fifteen degrees, because the wedges WOW^ and LOL' are equal in 
size and reaUy sectors of a great circle and their centers olf gravity 
when the wedges are small, are practically equal distances from 
the vertical line through the center of buoyancy. It is the posi- 
tion of this point M, with respect to the center of gravity G, 
that is the controlling factor in the stabiUty of a vessel. The 
point M is known as the meta-center and the distance between 
the point M and the center of gravity G the meta-center height. 
If this distance is great the vessel is said to be stiff y the length 
•of the lever GZ will be long and the vessel will roll back quickly. 
If the metarcenter height is short, the lever GZ will be short and 
the vessel will roll back slowly and is said to be tender. It is 
apparent, therefore, that if a vessel is stiff and rolls back quickly, 
the shock to the structure of the vessel is exceedingly great. In 
the case of saiUng vessels when the inetarcehter height is very 
great', owing to the low center of gravity, the quick retiun from a 
roll has frequently resulted in the snapping oflF of the masts. 
On the other hand a tender vessel in heavy weather owing to 
her slow righting power may suffer greatly or in extreme cases 
may capsize. 

The Control of Meta-center Height. — ^As the meta-center 
height is the important factor in the stability of vessels it is 
necessary to know how to regulate this height. This is done 
in two ways: first, by constructing vessels with sufficient breadth 
of beam, which has the effect of lowering the meta-center, and 
thus decreases the meta-center height; second, by so stowing the 
cargo that the weight is well distributed and the center of gravity 
properly placed. The business of stowing cargo, known as 
stevedoring is an art in itself. The question of stowage is 
important in all cases, but requires unusual attention in the 
case of a very Ught cargo such as cotton, ox a very heavy cargo 



76 MARINE INSURANCE 

such as nitrate. In the former case it is necessary tp stow heavy 
dead-weight cargo such as steel or spelter in the bottom of the 
holds to lower the center of gravity and prevent tenderness. In 
the case of heavy cargoes it is essential that the cargo be well 
distributed in the middle of the ship and built up high in bins 
if necessary, in order to raise the center of gravity and prevent 
stiffness. 

Loading Problems. — It will also be observed that in the case 
of coal- or oil-burning vessels, as the fuel is consumed the position 
of the center of gravity may change and may shift to one side if 
the fuel is not evenly consumed, thus greatly affecting the stabil- 
ity of a ship that has little margin of safety through excessive 
loading under and on deck. The disregard of these various 
factors results in marine losses for which imderwriters are 
called upon to respond, and some sUght knowledge of the 
principles underlying them is essential for all interested in mari- 
time affairs. The present work can merely mention these 
questions without fully considering them, but a very complete 
discussion of these and other kindred problems may be found in 
"Know Your Own Ship'' by Thomas Walton. 



CHAPTER 4 
THE SHIP AS A CARGO CARRIER 

Stresses and Strains. — While the marine underwriter does not 
pretend to be a shipbuilder, yet it is essential that he have more 
than a theoretical knowledge of the construction of ships. The 
underwriter relies to a great extent on the information given 
in coded form in the books of the various classification societies 
under whose supervision most vessels are built. These societies 
certify by granting a Class that the particular vessel when 
classified is properly built, especially with respect to structural 
strength, for the trade and service for which it has been designed. 
Without some underlying knowledge of the problems involved m 
shipbuilding these classification books will be unintelligible and 
may lead both merchant and underwriter into error. The 
consideration of the classification societies and their books will 
be passed for the moment, while attention is directed to the 
stresses and strains to which a vessel in operation is subjected. 
It is to withstand these that vessels are designed. As already 
indicated, ships are built to earn freight money, and having a 
limited amount of buoyancy, each additional ton of weight in the 
ship structure itself, reduces the dead weight capacity one ton. 
Herein Ues the danger to passenger, shipper and underwriter. 
Vessel owners naturally wish to make their vessels as light in 
weight as possible, and were it not for stringent rules of classifi- 
cation societies, the dangers of travel by sea would be increased 
for passenger, crew and cargo. 

The Strain of Unequal Weights. — If an unloaded steamer could 
be divided into five sections as in figure 1, each of exactly the 
sam^ weight, it would be foimd that the supporting surfaces of 
these sections would be unequal in size. That is, the section 
containing the machinery would be smaller than that comprising 
one of the holds, although both sections would be equal in weight 
and when immersed in water each would displace the same 
volume as was demonstrated in the consideration of displace- 
7 77 



78 



MARINE INSURANCE 



ment. Therefore, different sections of the steamer would sink 
to different depths in the water as shown in figure 2. However, 
the steamer is not in five separate pieces, but is one inseparable 
whole. While the total weight is supported by the total volume 
of water displaced, nevertheless the pressure is greatest at those 
points where a greater weight is contained in a less volume of 
space. The steamer must, therefore, be constructed to take up 
the strain caused by this unequal distribution of weight. Part of 
this strain is taken up when the vessel is laden with her cargo, 
because with careful stevedoring the weight of the steamer and 
her cargo can be fairly evenly distributed over the entire length 




w 




Fig. 1. 



• • 




Fig. 2. 

of the ship. As steamers are quite often light and sometimes 
make considerable trips in ballast, this particular condition must 
be compensated for in the ship structures. 

Strain of Lateral Pressure and of Wave Action. — ^A vessel is 
also subjected to strain caused by the lateral pressure of water, 
it being remembered that the pressure exerted at right angles to 
the submerged surface of a vessel in a horizontal direction is 
equal to the pressure exerted vertically or obliquely against its 
bottom. The greater the draft of the vessel the greater this 
crushing pressure becomes since the whole tendency of the dis- 
placed water is to regain its former place. Then again vessels 
must be built to withstand the strain of riding the waves. They 
should be so constructed that they are at least twice the length 



THE SHIP AS A CARGO CARRIER 79 

of the average wave which they will encounter. If a vessel is 
caught on the crest of a wave so that her bow and stem are out 
of water, she has a tendency to bend or break at the point 
of support. Quite often vessels are seen which are hogged as it 
is called, caused by structural weakness appearing when the 
vessel was so caught on a wave. On the other hand if the bow 
and stem of a vessel are each resting on the crest of a wave while 
the center of the ship has but little water under it, there is a 
tendency for the vessel to sag at the middle and possibly to 
break at this point. Either one of these causes was doubtless 
the reason for the loss of the tank steamer Oklahoma some years 
ago. The experience gained by disasters occurring to vessels 
through the efifect of the various kinds of strains, has led to im- 
proved types designed to meet with safety such stresses and 
strains. 

Panting Strains. — ^Another strain that vessels must be con- 
structed to withstand, is the pressure against the bow of the ship 
as it rushes through the water or as it plimges up and down 
in riding the waves. This causes what is known as panting strains, 
the tendency of the shell of the vessel being to work in and out as 
it passes through the water. Then there are the strains caused by 
the vibration due to the propelling machinery of the vessel. In 
the case of saiUng vessels pecuUar stresses are encoimtered due 
to the power of the wind on the sail smf ace. In the cases of 
auxUiary saU vessels, a combination of engine strain and wind 
strain is encountered necessitating especially strong construc- 
tion in this type of vessel. 

Other Strains. — Shipbuilders must also coimteract the strains 
caused by the heavy permanent weights carried on the deck, such 
as the wmches and, if necessary, guns carried as a means of defense 
against the enemy. The shock caused by the firing of these 
guns also produces unlooked-for results, as in a recent case where 
the gun practice on a merchant ship developed a crack in the 
stem frame. It is also customary in some trades to carry heavy 
deck loads and this added pressure must be compensated for as 
well as the enormous strain on the deck caused by the shipping 
of heavy seas. It is also necessary from time to time that vessels 
be put on dry dock for repairs and cleaning. In such cases the 
vessel is subjected to unusual strains, the ordinary support of 



80 MARINE INSURANCE 

the vessel being removed, all the weight being carried at a few 
supporting points. Vessels must be so constructed that they 
can withstand this unusual condition. 

Vessels in Ballast. — In the underwriting of the hulls of tramp 
steamers it must be remembered that oftentimes these vessels, 
in order to secure cargoes, make long voyages in ballast, that is 
without cargo, but with a certain amount of dead-weight load 
or ballast sufficient to submerge the vessel to a reasonable depth. 
Usually in the case of steamers in ballast, the propeller blades 
are not fully immersed and the working of the propeller partly 
in the water and partly out necessarily causes unusual strain 
on the blades. Furthermore, with the pitching of the vessel, 
the propeller at times will be entirely exposed and, unless great 
care is taken in the engine room, this will cause the engines to 
race, thus subjecting the motive power to unusual stresses. 
The exposed surface of the vessel when in ballast being greater 
than when loaded, the pressure of the wind and the force of 
breaking seas are felt with greater severity than in the case of 
a deeply laden vessel. The fact that the vessel is so far out of 
the water also makes her less easily managed and she will not 
answer her helm with the same degree of precision as when fully 
laden. Added to this, in many cases care is not taken in the 
stowage of ballast to secure it so that it will not shift. The proper 
way to stow ballast is first to adequately secure it, and second to 
so load it as to distribute the weight in such manner that the 
center of gravity will be as high as possible. The meta-center 
height is usually great in vessels in ballast and they are conse- 
quently stifif and snap back and forth in heavy seas, causing severe 
strains to the structure of the vessel. While it is true that the 
modern steamer is equipped with ballast tanks, it must not be 
assumed that these tanks are built into the vessel to enable 
it to go to sea without cargo. These tanks when full of water 
(and they should be either absolutely full or absolutely empty, 
to prevent water slushing round in the tanks in stormy weather 
and affecting the stability of the vessel) are a great aid to a 
vessel sailing in ballast. The primary purpose of the tanks, 
however, is to give the vessel proper trim when loaded with light 
cargoes. The trim of a vessel is her position in relation to her 
load line. There is a line painted on most ships, which shows the 



THE SHIP AS A CARGO CARRIER 81 

depth to which she should be submerged when fully loaded. It 
may be that for special reasons a captain will wish the bow of the 
vessel to be up a few inches and the stern down a few inches and 
he so trims the boat when it is being loaded. 

The Classification Societies. — ^As most vessels are built accord- 
ing to the rules and under the supervision of the classification 
societies, some description of their organization and methods 
will be of interest. The primary object of these societies is to 
see that the vessels built under their supervision ai e fully sea- 
worthy, so far as construction is involved, for the particular 
trade for which they are designed. It is in no sense compulsory 
that vessels be built under the supervision of the classification 
societies. Perhaps it would be well if this were so. However, 
a shipowner will experience considerable difficulty in procuring 
insurance on his vessel if it does not appear in the book of some 
recognized classification society with a mark indicating that it 
has been classed by that organization. The classification socie- 
ties promulgate rules for the building of wooden and metal 
ships. They have at the principal ports of the world where ship- 
building is carried on, agents who are experienced ship construc- 
tors or naval architects and who are familiar with the societies' 
rules and regulations and who are competent to oversee the 
construction of vessels. 

What a "Class" Signifies. — If a man intends to build a vessel, 
he will go to a marine architect and say that he wants a steamer of 
a given dead-weight capacity, suitable for a named trade, to 
be built in such manner that it will receive the highest class at 
say, Lloyd's or the American Record. The new owner may not 
be particular about the type of steamer which he gets, if it will 
fulfill the service for which he needs it, obtain the desired speed 
and will not exceed in cost the amount which he desires to spend. 
The architect accordingly designs a steamer to be built to the 
requirements of Lloyd's or the American Record. In the front 
of the books of these classification societies, there is set forth in 
great detail the standards of construction, material and work- 
manship which they require in a vessel, before they will grant 
their class. If the steamer is to be built under their supervision 
the plans and specifications will be submitted to them for exami- 
nation. If approved, construction will be commenced and from 



82 MARINE INSURANCE 

time to time their surveyors will examine the work done^ and will 
also make tests of the materials used in the construction of both 
the hull and the machinery. When the vessel is completed, a 
class will be assigned to the vessel, requirement being made, 
however, that as a condition precedent to the continuance of 
such class, periodical surveys shall be made and such repairs 
and replacements made as the surveyors of the society may 
demand. These periodical surveys may be made at any port 
where there is an authorized surveyor of the society and where 
proper dry-docking facilities are obtainable. 

Lloyd's Register. — These classification societies play an 
important part in marine underwriting. In fact the earliest 
** books" were those compiled by British Underwriters setting 
forth in brief and coded form, their opinion of the various vessels 
then in existence. The first "books" were brought out in 1764, 
1765 and 1766 and were very carefully guarded by their possess- 
ors. The paucity of information in these books, compared with 
the wealth of facts set forth in the modern book shows the 
gigantic progress made in such matters in the last one hundred 
and fifty years. These volumes issued by the underwriters at 
Lloyd's continued to be published from year to year, but in 1799 
a rival register was set up by shipowners who were dissatisfied 
with the treatment accorded by Lloyd's. The two registers 
continued to be published until 1833, when they were combined 
into one volume known as the "Register of British and Foreign 
Shipping." The following year the book appeared as "Lloyd's 
Register of British and Foreign Shipping" which has been pub- 
lished continuously until the present day. The organization 
publishing this book is entirely distinct from the Underwriting 
Association of Lloyd's London and has on its managing board 
underwriters, shij^wners, merchants and shipbuildL It is 
perhaps fair to assume, however, that the underwriting fraternity 
is the dominant factor in the organization. They pay for the 
mistakes of merchants, architects and shipbuilders and it is but 
natural that they should be the chief advocates of better built 
ships. 

Rival Organizations. — Rival organizations were started in 
other countries, because it was felt, and with reason, that Lloyd's 
discriminated against vessels of other than British build. Now 



THE SHIP AS A CARGO CARRIER 83 

there are a number of societies all performing the same Kmd of 
service and naturally in the bidding for business modifying the 
stringency of their requirements, with consequent detriment to 
the soundness of the vessels constructed under their supervision. 
However, underwriters soon discover whether or not the require- 
ments of the societies are as stringent as they should be and 
classification is not of equal value in all societies. The fact that 
a ship has a class in one of the less reputable societies warrants 
the natural inference that her construction is such that the better 
societies would not class the vessel. However, the mere fact that 
a vessel is unclassed does not necessarily condemn it. Lack of 
class usually indicates one of two conditions, first, that the vessel 
is of such inferior construction that no classification society 
would be sponsor for the boat, or second, that the vessel may be 
constructed so much in excess of the requirements of any society 
that the owners are not warranted in incurring the additional 
expense necessary to have the boat classed. This latter condition 
exists with many steamers of the first-class passenger and freight 
lines. 

Necessity for Understanding Classification Society Codes. — 
It is absolutely necessary for marine underwriters and important 
for merchants also, that they l^e able to read intelligently and 
understanding^ the books of the classification societies. The 
information is printed in coded form, each book having its own 
code which appears translated at the opening of the volume. It 
must be remembered that each organization has classes of dif- 
ferent degrees and it should not be inferred simply because a 
named steamer is clashed in the American Record for instance 
that it is fit for the intended employment. Classes are given 
for harbor, river, lake, coastwise, ocean and other services, and 
unless the class marks are understood, underwriters in insuring 
and merchants in engaging freight space may be led into serious 
error. A portion of a page out of the American Record is re- 
printed here, which will give an indication of the wealth of 
information which is furnished in small compass by these volumes. 

The American Record. — This record is published by the 
Bureau of American and Foreign Shipping, an organization 
started many years ago to foster American shipping and re- 
organized within recent years on a plan commensurate with the 



MARINE INSURANCE 




T 



I 



mm 



s- ii « ^= m s>i ji; g' 5^ -^ 



UUl 



.^ .a ail js IT 



i Fi I; i! I; 
i -sg jj jj jj 



^ 1^1 'i^'A'i^ i 'i 



l 

Hi 




353 1 11 



THE SHIP AS A CARGO CARRIER 86 

position which the American Merchant Marine is to take in the 
world's commerce. Its success will depend largely on the support 
and encouragement which it receives from the underwriters, 
merchants, shipowners and shipbuUders of this country. It is a 
gratifying indication of the trend of the times, that the larger 
part of the ships being constructed for the United States Shipping 
Board are being built under the supervision of this bureau. 

Underwriters- Surveyors. — The well-organized underwriting 
office does not depend altogether on the records of vessels as 
shown in the Classification Society Books but has a staff of 
competent surveyors of its own. It will be appreciated that a 
steamer apparently in first class condition in the Society's 
Book may have experienced disaster, or may have been per- 
mitted to run down since her last Classification survey. It 
therefore is prudent for the underwriters so far as possible to 
have their own vessel records and their own surveyors, in whose 
judgment they have confidence, to specially report on vessels 
which are offered for insurance. 

Underwriters' Organizations. — ^The marine insurance busi- 
ness is well organized and to aid and protect underwriters there 
have been established here and abroad societies whose purpose 
it is to foster the business and to obtain uniformity of action 
among underwriters. In this country there was organized some 
years ago the American Institute of Marine Underwriters whose 
purpose it is to formulate general clauses to meet special con- 
ditions, to follow and recommend or oppose proposed legisla- 
tion in regard to marine insurance and to keep in close touch with 
similar organizations in Great Britain and other foreign countries. 
There are also other organizations such as the American Hull 
Underwriters' Association and the Atlantic Inland Association 
whose purpose it is to promulgate rates and conditions for the 
insurance of the special class of risks coming within their purview. 
These organizations are helpful in stabilizing rates and afford 
a common meeting place where the assured or his broker can dis- 
cuss proposed insurance and reach a better understanding of 
the requirements of underwriters. 

Underwriters' Boards and Loss Agents. — On the loss side of 
the business there are the Underwriters' Boards such as the New 
York Board of Underwriters and the National Board of Marine 



86 MARINE INSURANCE 

Underwriters, who have representatives at the principal ports 
of the World. These representatives send prompt reports of 
disasters occurring within their territory and are competent to 
take charge of operations looking to the safeguarding of the 
imperiled property. They also survey damaged goods and issue 
certificates showing the nature and extent of the injury suffered. 
These Boards supervise the loading of vessels and promulgate 
rules for the proper stowage of bulk and other extra hazardous 
cargoes. Their representatives grant certificates showing that 
vessels are fit to load the proposed cargoes and when loaded 
certify that the loading is proper. Obviously, these organiza- 
tions are merely voluntary, and are powerful protecting factors 
in overseas commerce only in so far as they receive the support 
and encouragement of imderwriters and shipowners. The work 
performed by Lloyd's Agents, that is the agents of the Under- 
writing Organization of Lloyd's, London as distinguished from 
the Classification Society, is somewhat similar, but is much more 
extensive in its application. These agents are also news gather- 
ers and daily and hourly in fact send by cable or letter interesting 
facts in connection with marine matters, which are published in 
the daily and weekly papers of the organization. A similar 
work is performed in this country by the Maritime Association 
of the Port of New York. 

Salvage Associations. — The Salvage Associations are usually 
privately organized, but sometimes have on their boards of 
managers representatives of the underwriters. These organiza- 
tions, as the name implies, attend to the salvaging of both ships 
and cargo when damaged or in a position of peril. Some of these 
organizations such as the London Salvage Association have their 
own wrecking department fully equipped with vessels and machin- 
ery suitable for salvage operations. Other organizations call 
in, when needed, private wrecking companies who are experi- 
enced in salvage work. These associations do much to reduce 
marine losses and are of value not only to the underwriters but 
to merchants and shipowners as well. 

Maps, Charts and Port Books. — ^The Underwriting office 
itself must be equipped with or have access to maps, charts and 
port books showing the ocean tracks, paths of the winds, currents, 
lighthouses, wireless stations, particulars of ports with respect to 



THE SHIP AS A CARGO CARRIER 87 

depth of water, berthing accommodations, facilities for supplies 
of fuel and stores and the numberless other items of information 
which it is necessary for an underwriter to know in order to 
inteUigently consider a risk from the geographic viewpomt. 
Improvement in port conditions and changes in commercial 
methods are so rapid that an underwriter must keep abreast of 
the times and be informed as to present conditions with respect 
to shipping and commerce, not only in his own country but also 
in foreign nations. 

The Tools of the Undemmter. — The classification societies, 
underwriters' organizations and the various publications in 
regard to marine matters may be called the tools of the under- 
writer. As every skillful workman must be fully equipped with 
the tools necessary for his particular work and understand their 
use, so the marine underwriter must have his tools and fully 
understand their use and purpose. 

Factors in Underwriting-Nationality. — Having in mind this 
general r6sum6 of what may be called the physical background 
of marine insurance, it will be of interest, before proceeding to 
the consideration of marine insurance principles, to mention some 
of the factors which an underwriter must take into accoimt in 
deciding whether or not a risk offered is acceptable. First of 
all the question of the nationaUty of the vessel is of great moment. 
In war times its importance is apparent, but in times of peace 
while this factor is of only slightly less importance, it9 bearing 
on the risk Ues beneath the surface. It is a well-known fact that 
certain nations have produced more skillful mariners than others. 
The adaptabiUty of a people to a seafaring life is largely a matter 
of temperament. This fact is of no Uttle importance to under- 
writers, because at a time of crisis, when the captain and crew 
have to think and act quickly and clearly, the citizens of those 
nations whose heritage has been connected with the sea, seem to 
have the innate abiUty to do the right thing at the right time and 
to take advantage of every opportunity to preserve the ship and 
the cargo. 

Owners, Managers and Masters. — The ownership of a vessel 
is also a matter of much concern. It is a singular fact that some 
owners run their vessels without incurring many accidents, 
while others born perhaps under less lucky stars are always in 



88 MARINE INSURANCE 

trouble. An underwriter is not so much interested as to why one 
ownership is good and another bad, as he is in the fact itself. An 
owner or a line may innocently acquire a bad reputation, but 
more often such reputations are the result of incompetent man- 
agement. Poor management results in deteriorated, insuffi- 
ciently equipped vessels, often incompetently officered and 
manned. Truly in shipowning and ship managing " a good name 
is rather to be chosen than great riches.'' There is another side 
to the question of ownership. An owner may keep his property 
in good condition, he may employ competent officers and crews, 
but his reputation for fair dealing in cases of disaster, when so 
much depends on the attitude of the shipowner, may make 
underwriters wary of accepting risks on his vessels. Up to within 
a year or two Lloyd's London published a volume which listed 
all British steamers under their owners. These lists contained 
not only all boats presently owned, but all vessels formerly 
owned and which had met an untimely end through disaster or 
had ended their career in the scrap heap. This book gave 
the history of each vessel showing the various disasters to hull 
and machinery and where they had occurred. This volume, 
which will doubtless be published again when the world resumes 
its peaceful course, was obviously published for the confidential 
use of underwriters, and afforded a vivid picture of the results of 
good and bad management. Lloyd's have also a record, giving 
in brief form, statistics in regard to the life career of all British 
ship masters, showing the ships which they have commanded 
and what misfortunes they have experienced with their vessels. 
The value of a risk is influenced not a little by the character of 
the master to whom the venture is entrusted. 

Structural Characteristics of Ship and Its Physical Condition. — 
The material of which the vessel is built, her structural plan, 
her engine, horsepower and interior condition with respect to 
the protection of cargo which may be carried in her hold are all 
matters of moment to underwriters. If a great single deck bulk 
freighter is put on the berth to load a general miscellaneous cargo, 
the underwriter must think what will be the effect on barrels of 
oil or other cargo placed in the bottom of the hold which will 
have to sustain the pressure of the weight of cargo loaded above. 
Or if it be a tank stieamer which has carried bulk petroleum to 



THE SHIP AS A CARGO CARRIER 89 

Cuba and is to return to the United States with a cargo of molas- 
ses, the underwriter will be interested in knowing if the hold has 
been steamed or otherwise cleansed before the molasses is 
loaded. If the vessel is to carry a perishable cargo such as green 
cofifee or cocoa beans it is pertinent to inquire whether the holds 
are fitted with cargo battens and properly dunnaged to protect 
the cargo from the moisture which may condense on the inside 
of the vessel. If a full cargo of grain is to be loaded, question will 
arise as to whether the vessel has been properly equipped with 
shifting boards and wing feeders. These illustrations will serve 
to indicate the trend of an underwriter's thought in considering 
the physical condition of the vessel. 

Other Considerations. — Again, the season of the year during 
which the voyage is to be made becomes of interest when we 
recall the periodic storms which run their courses on the ocean 
and the ice conditions which exist at certain seasons on the 
Great Lakes and in other places in the cooler latitudes. In the 
case of cargo insurance the kind of goods to be insured is im- 
portant, considered not only for its intrinsic qualities, but also 
for its usefulness at the port of destination. It may be that in 
the event of disaster there will be small salvage to the goods or 
there may be no market at the port of destination or at an in- 
termediate port of refuge for damaged goods of the particular 
character in question. 

The Measurement of Ships. — An underwriter is often asked 
to quote on a full cargo of grain, or other bulk cargo, it may be 
without any definite information being given as to the quantity 
to be laden. It is important that he have some rule by which 
he can quickly estimate the quantity which the vessel can carry 
and from this quantity arrive at the approximate value of the 
cargo. In the books of the classification societies there is usually 
given in the tonnage column two figures, one larger than the 
other. In a previous chapter the displacement of a vessel was 
described at the weight of the vessel in tons. The tonnage of a 
vessel as shown in the classification society books is not displace- 
ment tonnage but measurement tonnage. Many years ago in 
order to gain uniformity in the measurements of vessels, there 
was arbitrarily adopted in Great Britain a measurement ton of 
100 cubic feet, and this unit of measure has generally been ac- 



90 MARINE INSURANCE 

cepted by other nations. The tonnage shown in the Classifica- 
tion Books therefore indicates the number of tons of 100 cubic 
feet each contained in the boat, the larger figure indicating the 
number of measurement tons in the enclosed watertight portion 
of the ship, without any allowance being made for necessary 
engine, crew,luel and store space; the smaller figure showing the 
measurement tonnage with these spaces deducted. The larger 
figure is known as the gross tonnage, the smaller, the net ton- 
nage. Sometimes in the case of passenger boats an intermediate 
measurement of the vessels, before the passenger accommoda- 
tions are deducted, is shown. There are elaborate rules for the 
measurements of gross, intermediate and net tonnage, which 
vary in different countries and in connection with the tonnage 
dues at the Panama and Suez Canals. 

The Measurement of Cargo Capacity. — ^While the measure- 
ment ton is 100 cubic feet, a ton of average deadweight cargo 
occupies only about 40 cubic feet. This is true of grain and 
many other bulk cargoes. It is therefore possible in such cases 
to load about two and one-half tons of cargo in one measurement 
ton of space, and as each thirty-five- cubic feet of water wOl 
support one ton (see ante, p. 69), it will therefore be quite 
possible to load more than twice the net registered tonnage with 
grain and still not have exhausted the supporting power of the 
water. Whether or not this quantity of grain could be loaded 
would depend somewhat on the structural arrangement of the 
particular vessel in question, and the necessity of having adequate 
freeboard. In this connection Professor Emory R. Johnson, 
in Ocean and Inland Water Transportation, cites the following 
rule in regard to loading* 

"The ratio of net register to cargo tonnage of the modem freight 
steamer loaded with general cargo is as 1 to 2^- In the large modern 
sailing vessel the cargo tonnage of the loaded vessel will average about 
1% times the net register." 

To apply this rule to the proposed full cargo of grain, the under- 
writer would multiply the net registered tonnage, by say 23^. and 
multiplying this result by the value of the grain per ton obtain 
a fair approximation of the values of the contemplated cargo. 
Some graphic idea of the cargo capacity of a freight steamer of 



THE SHIP AS A CARGO CARRIER 91 

say 4000 net tons may be gained by considering how much bulk 
there is to 9000 tons of wheat, the quantity which such a vessel 
could carry under the above cited rule. Each ton of wheat 
consists of approximately 40 bushels, so that this vessel could 
carry 360,000 bushels. The average yield per acre is say 30 
bushels, so that this cargo will represent the yield of 12,000 
acres or about 20 square miles of land. To carry this grain to 
the vessel will require a train of 180 cars, each carrying 50 tons 
and stretching over a mile in length. Such are the giant freight 
boats that enable this country to be the granary of the world. 

Cargoes and Shipping Packages. — ^While it is true that the 
physical condition of the ship itself must be considered, it is no 
less true that the underwriter must give thought to the intrinsic 
qualities of cargo which is offered for insurance and of the nature 
of the package in which such cargo is shipped. In some countries 
it is a difficult and expensive matter to obtain wood to make 
packing cases and accordingly articles easily damaged, packed 
in inferior containers place an additional burden on underwriters. 
It is also a fact that packing cases or barrels used in importing 
goods into a foreign country, may be again used in the export of 
goods. This is notably true in the shipment of oil from the 
Far East where the second hand barrels and cases in which 
American oil has been imported are used in the export of the 
native oils. The consequence is that heavy leakage claims 
result. An underwriter's education is never completed. Day by 
day he must keep abreast of the new conditions which are occur- 
ring in all parts of the world and be able to deduce the effects which 
these new conditions will have on marine underwriting. 

The Moral Hazard. — ^Before passing from the consideration 
of the factors which are important in the judging of risks, mention 
must be made of what is undoubtedly the primary and most 
important factor in marine underwriting. As will be pointed 
out in subsequent chapters, the whole fabric of marine under- 
writing is based on good faith and fair dealing existing between 
underwriter and assured. This element in the marine contract 
is little talked of but is ever present and is known as the "moral 
hazard." An underwriter must rely to a very large extent on 
the statements made by a merchant or shipowner with respect 
to the risk offered for insurance. To be sure, the underwriter 



92 MARINE INSURANCE 

has some documentary evidence in the classification books 
respecting the 'vessel, but in many cases he knows nothing defi- 
nite regarding its present condition. When the subject matter 
is cargo, the underwriter must rely almost entirely on the in- 
tegrity of the insured, and his willingness to tell of any unusual 
circumstances connected with the shipment. The underwriter 
is presumed to know all the usual conditions in regard to various 
kinds of goods and their mode of shipment, but as a rule he is 
working on theory alone and has no opportunity to actually 
view the goods. The result is that an underwriter must be a 
reader of character and a judge of the hearts and intents of men. 
After a loss has occurred, it is too late to discover that an assured 
is a deceiver or a skillful talker, perhaps telling the truth in 
regard to the risk, but not the whole truth. The experienced 
and careful underwriter must be able to judge the character of a 
man at sight, instead of discovering his deficiencies in the ex- 
pensive and bitter school of experience. And so in passing to the 
consideration of marine insurance principles and practice it is 
well to understand that the profession of marine underwriting 
is a serious one, calUng for the greatest degree of skill and knowl- 
edge and for a more than ordinary equipment of common sense 
and ability to judge men. 



CHAPTER 5 

THE CONTRACT OF MAMNE INSURANCE. RULES 

FOR CONSTRUCTION 

Definition of Marine Insurance. — Marine Insurance is a 
contract of indemnity whereby one party called the assurer or 
underwriter agrees for a stated consideration known as the 
premium, to indemnify another party called the insured or assured 
against loss, damage or expense in connection with the subject 
matter at risk if caused by perils enumerated in the contract 
known as the policy of insurance. It should always be borne in 
mind that a policy of insurance is a personal contract and insures 
the person or persons interested in the subject matter and not 
the subject matter itself. The policy promises to indemnify the 
assured for damage arising out of the loss or damage of the prop- 
erty insured, but does not guarantee the continued existence or 
replacement of the thing itself. 

Not a Perfect Contract of Indemnity. — A marine insurance 
policy is not a perfect contract of indemnity. To indemnify 
means to make good, to put a person back in his original condition 
with respect to a specified thing or a certain condition. In- 
surance strives so far as possible to make good whatever financial 
loss a person may have suffered, through the destruction or de- 
preciation of the intrinsic value of the commodity to which the 
insurance relates, but does not endeavor to reimburse the assured 
for any sentimental or esthetic value unless it is definitely 
possible to financially measure such vialue and the underwriter 
and assured have mutually agreed that such value shall be insured. 

Only Fortuitous Losses Covered. — Marine insurance was never 
devised to protect the assured against all loss or damage which 
may overtake his property, but only against those losses which are 
fortuitous and beyond the control of the assured. The policy 
will not cover damages which are inevitable or usual because of 
the nature of the goods, the shipping package or the voyage in 
question. Competition, it is true, has greatly modified this rule, 
8 93 



94 MARINE INSURANCE 

but the principle remains and should always be enforced in the 
case of vice propre losses; that is losses which are the result of 
the inherent qualities of the subject matter insured and not the 
result of casualty. Perhaps, the best illustration of what is 
meant by vice propre or inherent defect is the loss caused to 
flour through the appearance under certain conditions of weevils 
and grubs the result of the very nature of the commodity itself 
and not caused by any outside force. 

Negligence Should Not be Covjered by Policy. — ^Neither should 
marine insurance agree to indemnify the assured against losses 
which are the result of the negligence or carelessness of those into 
whose custody the property is given. That is, the insurer should 
not assume liabiUty for loss or damage caused through the neglect 
of carriers whether private or common. The law charges the 
carrier under the biU of lading with certam duties which he should 
be compelled to perform, and the assured should not be per- 
mitted because of insurance to become remiss in his duty of 
enforcing carriers to comply with their obligations. True, it is 
often easier to insure against some risk which is an obligation of 
the carrier than it is to enforce the obUgation without the use of 
legal pressure, but the inevitable result of such a course over a 
period of years is detrimental to all concerned. This is abundantly 
shown in the matter of pilferage claims. Such losses are the 
result of negUgence on the part of those into whose custody 
property is entrusted. Through lack of protection packages are 
opened and part or all of the contents removed. For this loss 
the carrier responds if it can be shown that the pilferage took 
place while the goods were in his possession. Owing to the delay 
in collecting such losses, underwriters were urged to give protec- 
tion against such losses so that the assured might be promptly 
reimbursed and not have to wait on the convenience of the 
carriers. Some underwriters consented, with the result that the 
writing of pilferage insurance became general. The carriers 
knowing that the shipper could obtain protection against such 
losses, were less ready to settle these claims practically denying 
liability in many cases and interposing all sorts of objections 
to the claims presented. Limitations of UabiUty have also been 
inserted in bills of lading where possible, limiting the amount for 
which the carrier assumes liability to a merely nominal sum. 



'1 



THE CONTRACT OF MARINE INSURANCE 95 

The result is that some carriers have successfully, if not legally, 
avoided their Uability for these losses and as a consequence have 
relaxed their watchfulness, with the natural result that pilferage 
losses have assumed enormous proportions. Underwriters are in 
a quandary to know how to extricate themselves from a diflScult 
situation into which they have unwittingly allowed themselves to 
be drawn. Eventually the assured will pay for these losses and 
upon him will be visited the restilt of his demand of underwriters 
for protection against losses which are the liability of carriers 

The Effect of Insurance. — The procurement of marine insurance 
by the assured results in the distribution to the ultimate consumer 
of the losses which overtake property in oversea and overland 
commerce. The underwriter charges a premium for the insur- 
ance of the risks which he underwrites. This premixmi charge 
becomes one of the items in the invoice for the sale of the goods, 
and in the freight rate, which is also an item in the invoice, there 
is included indirectly part of the cost of insuring the hull of the 
vessel. In this way the cost of insurance becomes part of the 
price of the goods and is an indirect charge on the consimier. 
The underwriter assmnes the burden of the losses and thus stabil- 
izes prices and makes possible large commercial transactions. 

The Law of Averages. Competition. — In fixing rates adequate 
to compensate him for the losses paid and the expenses incurred, 
and to produce a profit on the capital invested, thle underwriter 
works on the law of averages. This average is not the result 
shown by the outcome of a few risks but the result shown by 
many risks of the same kind over a period of years. Ten years 
is a fair period from which to draw deductions, for in this length of 
time practically every condition peculiar to a given trade will 
occur and the number of risks run in such a period wiU be suffi- 
ciently great to enable fairly accurate conclusions to be drawn. 
But in the last analysis such deductions are not more than an 
approximation toward scientific accuracy. Competition serves 
to hold rates down to the pomt where there is only a fair margin of 
profit on the capital invested. If the rates on a certain Une of 
insurance are such that an undue margin of profit results, under- 
writers who are not actively engaged in this particidar branch of 
the business will cut rates in order to get a share of the good 
business and those who are underwriting this particular kind of 




96 MARINE INSURANCE 

risk will necessarily be forced to meet this competition. On 
the other hand if a certain line of business proves unprofitable 
underwriters will forego this class of insurance unless higher rates 
will be paid by merchants or shipowners. So it is that rates 
fluctuate within narrow limits. In addition underwriters always 
face the possibihty that if undue profits are made on any particu- 
lar class of business, self insurance may result, merchants and 
shipowners figuring that if the underwriter can make money by 
assuming the risk they can save money by carrying it themselves. 
But unless they have a very large and diversified business such 
reasoning is fallacious, as they will not have sufiicient distribution 
of risk to permit the law of averages to play its part and a severe 
total loss may furnish a pointed object lesson of the folly of self 
insurance under ordmary conditions. 

Modern Policy Broad in. Its Protection. — Transportation 
insurance would probably be a better modern name for so-called 
marine insurance. The present-day marine insurance policy on 
goods covers property from the time it leaves the shipper's ware- 
house until in due course of transit it is deUvered by land and/or 
water conveyances to the consignee's warehouse. It is in its 
broadest sense transportation insurance by land and/or water and 
consequently merchandise should never be covered by a marine 
policy, after transit has ceased or after the property has been 
placed in the custody of the owner. 

Good Faith. — ^In no branch of the insurance science does good 
faith play so large a part as in the marine field. An underwriter 
is often asked to insure a ship or a cargo thousands of miles away 
without making any inspection of the risk. In such cases he must 
rely absolutely on the statements made by the appUcant in so far 
as they relate to matters which cannot be confirmed by the 
information which the underwriter has at his disposal in the classi- 
fication society books and in the shipping papers. He is, it is 
true, protected in a measure by the impUed warranties, such as 
seaworthiness, which are read into the contract, but to a great 
extent he must rely on mformation which he cannot confirm. 
It is true therefore that good faith and fair dealing are the corner- 
stones on which the marine insurance business is founded. 

Elements of a Contract. — To have a valid contract of insurance 
the following elements must appear, viz.: 



THE CONTRACT OF MARINE INSURANCE 97 

1. The parties to the contract must be legally competent to 
make a contract. 

2. The Assured must have an insurable interest. 

3. A valid consideration must pass (the premium). 

4. There must be a meeting of the minds of the contracting 
parties. 

5. The contract must have a legal purpose. 

Corporate and Individual Underwriters. — Basically a marine 
insurance contract is no different from any other. The legal 
safeguards surrounding contracts in general are applicable to 
insurance contracts, and in addition there have been read into the 
latter many conditions for the protection of both assured and 
underwriter which are not included in other forms of agreement. 
In this country at the present time marine insurance is conducted 
almost exclusively by incorporated companies. These co ipora- 
tions chartered by the various states are legally competent to en- 
gage in the business of insurance so far as'they are given authority 
under their charters. There seems to be no valid reason, how- 
ever, why individuals should not engage in business as under- 
writers. Formerly this was done, but the American mind has 
turned more readily to the corporate form of underwriting 
with its published statements of assets, liabilities and surplus. 
This condition contrasts greatly with the composition of the 
English marine insurance market wherein individuals under- 
writing at Lloyd's and elsewhere form an important part of 
the market. Any one may be an assured if he is legally com- 
petent to enter into a contract. That is, he must be of legal 
age and of sound mind and must be otherwise within the rules 
which the law prescribes regarding contracting parties. 

An Insurable Interest Necessary. — But no person can become 
a party to a marine insurance contract unless he has an insurable 
interest. That is, the assured must bear such a relation to the 
insured subject, that directly or indirectly he will be benefited 
by its safe arrival or continued existence or be injured by its 
damage or loss. In other words a person cannot legally, merely 
because he knows that there is certain property subject to marine 
hazards, take out insurance on that property for his own benefit. 
The party seeking insurance must bear some provable relation 
to the property itself in order to insure it for his own benefit, 



98 MARINE INSURANCE 

or there must exist some legal relation of agency to enable one 
to take out insurance for the benefit of another who has a valid 
insurable interest. Insurance which does not stand the test of 
these two conditions is void in law, and in some of our states and 
in Great Britain is prohibited by statute. 

The Premium a Valid Consideration. — The third requirement 
of the marine insurance contract is that there be a valid con- 
sideration. In every legal contract it must be possible to show 
that the person who performs or agrees to perform some service 
receives or will receive some adequate compensation. The 
parties themselves are, however, the judge of the adequacy of 
the compensation, and its intrinsic value is not as important as 
is the fact that the parties agreed to some measure of compen- 
sation. So we find in all insurance contracts provision made for 
the payment by the assured to the underwriter of a sum of money 
called the premium. How large or how small this amount may 
be is legally of no consequence, if the assured and the underwriter 
have mutually agreed on the amount charged. If the insured 
subject is lost the underwriter cannot refuse to pay on the ground 
that the premium was too low, neither can the assured in the 
event of safe arrival legally demand part of the premiiun back. 

The Minds of the Contracting Parties must Meet. — It is 
a basic principal of the law of contracts that the minds of the 
parties must meet. If the assured and the underwriter enter into 
negotiations for insurance relating to a certain subject or condition, 
and if the assured has one subject or condition in mind while the 
underwriter has a similar but, in effect, entirely diiBferent subject 
or condition, even should they complete their negotiations and 
a policy be issued, it will not be valid or enforceable in law. The 
contract as issued does not relate to anything which was common 
to the thought of both parties, and therefore is null and void and 
of no effect. It is therefore of the highest importance in the 
procuring of marine insurance that a full disclosure of all facts be 
made, so that no misunderstanding may exist as to the amount to 
be insured, the quantity and kind of property, the carrying con- 
veyance, the voyage to be run and the date of sailing or shipment. 
How important each of these elements of an insurance contract 
is will appear in a subsequent detailed discussion of these phases 
of the insurance policy. The question of fair dealing plays 



THE CONTRACT OF MARINE INSURANCE 99 

such an important part in marine insurance that the law has 
required a fuller disclosure of the facts relating to these contracts 
than it does with respect to other contractual relations. 

A Legal Purpose Necessary. — ^That a contract must have a 
legal purpose is self-evident. The law will not tolerate prac- 
tices against public policy under the guise of insurance. Gam- 
bling done in the form of insurance is as injurious to the public 
morals as is gambling done in a less respectable way. The 
issuance of insurance in connection with transactions which are 
contrary to law, is tainted with the same defect as is the trans- 
action to which the insurance relates. Insurance is a necessary 
part of the commercial life of the nations, but aids in the conduct 
of conmierce only so far as it compUes with national and 
international law. 

Direct and Indirect Placing of Insurance. — ^Two methods of 
placing insurance are in vogue. A merchant may treat with an 
underwriter directly or he may turn over to a broker, who is 
trained in the practice and principles of marine insurance, the 
placing of his insurance for him. Each method has its advan- 
tages. An insured in dealing directly with an underwriter may be 
able to present the risk in a more favorable light than the broker, 
because he has a fuller knowledge of the peculiar character of the 
property which he is msuring and can in many cases demonstrate 
to the underwriter the result of the action of sea water and the 
effect of handling on the commodity on which insurance is 
desired. On the other hand, if the merchant has not a fair under- 
standing of insurance principles, he may greatly harm himself 
by asking for and accepting insurance which does not fully 
protect his property. Thus it has happened in not a few cases 
within recent years that an assured has unwittingly assumed 
that the ordinary form of marine policy covered the risks of war. 

Brokers. — If the business of a merchant or shipowner is so large 
and diversified that he has to deal with many underwriters, or if 
his business is smaller but he has little knowledge of the intricate 
problems involved in marine insurance he will do well to give the 
placing of his insurance into the hands of some competent broker. 
The subject of brokers will be given further consideration in a 
later chapter. It will suffice to remark here that a competent 
broker should have the same technical knowledge and training 



100 MARINE INSURANCE 

as an underwriter. Much progress in underwriting has resulted 
from the demands of brokers for new forms of protection, but on 
the other hand the demands of brokers controlling large volumes 
of business have caused underwriters at times to depart from 
sound underwriting principles. The broker occupies an anoma- 
lous position. He is employed by the assured but is paid by the 
underwriter and accordingly occupies the invidious position of 
trying to please both parties to the insurance contract. 

The Insurance Application. — In placing insurance whether it 
be an open contract or a special insurance, the basis of the 
contract is the insurance application. If a merchant wishes to 
insure 100 cases of dry goods from New York to Bombay, he 
goes to an insurance company directly or through his broker and 
fills out a printed form providing spaces for the name of the 
assured, for the account on whose behalf the insurance is desired 
and for the payee of any possible loss. Spaces are also provided 
for the amount of insurance desired, the number of packages and 
kind of goods, the name of the carrying vessel, the points of 
shipment and the destination. The approximate date of ship- 
ment or of the sailing of the vessel should also be given (see appli- 
cation form Appendix, p. 370). 

Binders and Inquiries. — Having filled out this application form 
in duplicate, the assured or the broker presents it to the under- 
writer who considers the facts presented, and then turns to the 
classification society books or to his own private records for a 
description of the vessel. He then either names a rate and 
indicates the conditions under which he will grant insurance or 
declines the risk. If the rate and conditions are acceptable to the 
assured or broker he will sign the original application, hand the 
forms to the underwriter who. initials the duplicate returning 
it to the assured or broker, and a binding contract of insurance has 
been entered into. All that now remains to be done is for the 
underwriter to fill out the formal policy of insurance which he 
signs and deUvers to the assured or his broker. It may be that 
the assured or his broker will wish time in which to consider the 
rate and conditions quoted, in which case the application forms 
will not be signed but one copy will be retained by the under- 
writer on a "not binding" file. This is merely an inquiry for 
and a quotation of a rate and in marine insurance terminology is 



THE CONTRACT OF MARINE INSURANCE 101 

known as an "inquiry." This quotation like any other offer 
must be accepted within a reasonable time or the underwriter 
may limit the time within which acceptance may be made. 
The underwriter may withdraw the quotation at any time prior 
to actual acceptance. The same procedure is followed whether 
the insurance desired relates to hull, freight or cargo and is for a 
special risk or for contemplated risks to be insured under an 
open contract. 

The Policy. — ^The policy which is issued by the underwriter as 
the formal evidence of the contract is one of the quaintest docu- 
ments extant. For over three hundred years the basic or skeleton 
form of this contract has changed but httle. Additions have 
been made, it is true, but these to the lay mind have tended 
rather to confuse than to clarify its meaning. The present 
Lloyd's form differs little from the copy of the "Tiger'' policy 
issued in 1613 found in the Bodleian Library at Oxford and the 
forms used in the United States are merely adaptations of 
Lloyd's policy modified to meet American law and practice. 
The form of expression is that of an age long since past and the 
enumeration of the perils insured against is evidence that they 
were added one by one as occasion demanded. They follow 
each other in no logical order, war and marine perils appearing in 
indiscriminate sequence. Much as the form has been amended 
by the addition of modifying clauses, no one has attempted to 
change the basic wording of the form. It may be said without 
undue violence to the truth, that every word in the basic form 
has been weighed in the judicial balance and its meaning de- 
termined. Quaint as the docmnent is, there is no doubt as to 
its meaning, and any material change might greatly weaken its 
force. 

Rules for Construction. — ^The great body of laws, customs and 
decisions which has been gathered round this basic form of 
policy give evidence and definition of the principles and practice 
of marine insurance. No clause should be added to the form nor 
should any deletion be made until careful thought has been 
given to the effect of the addition or subtraction on the remainder 
of the contract, in the light of these principles and practices. 
A considerable body of rules for the construction of the policy 
has developed, some of which are applicable to the interpretation 



102 MARINE INSURANCE . 

of all contracts, while others apply specially to marine insurance 
contracts. A more extended consideration of these rules will be 
helpful to a clear understanding of the policy itself. 

Usage.— When it is recaUed that the law relating to marine in- 
surance is largely an acceptance and adaptation of the customs of 
merchants it is not strange that usage controls to a great extent 
the meaning of marme poUcies. The parties concerned may of 
course so draw the contract that its obvious import is to override 
and overrule the ordinary usage in connection with simUar trans- 
actions, and so far as such contracts do not conflict with the law 
they are perfectly proper and will be enforced as written. That 
is to say, usage is only brought into evidence where it is required 
to give proper meaning and force to the contract. 

Mercantile Customs. — Owing to the fact that custom plays such 
an important part in mercantile transactions and especially in 
marine insurance contracts it is necessary in many cases to go 
outside of the contract itself in order to determine the iiitention of 
the parties. It would be manifestly inpracticable to incorporate 
into each policy the customs and usages of the particular trade 
to which the insurance relates and in the absence of affirmative 
evidence indicating that the voyage was to be conducted in some 
particular way, it will be presumed that the usual course and 
customs of the trade are to be followed. This does not mean, 
however, that extrinsic evidence is to be read into a marine policy 
to show that the intent of the parties was different from the fair 
meaning of the words used. It does mean that a short phrase 
describing a voyage for instance as a trading voyage to West 
Africa carries with it liberty to touch and stay for the purposes of 
ordinary trading at the usual trading stations along the West 
African Coast. 

Printed, Written and Stamped Words. — ^All policies consist in 
part of printed and in part of written or stamped words. The 
printed part expresses that which is common to all marine poU- 
cies. The written or stamped portions set forth those facts and 
agreements peculiar to the particular policy. It therefore is 
presumed that the written or stamped portion was the subject 
of special consideration by the parties and when in conflict 
with the printed words, overrules or controls them* It is these 
written or stamped words and clauses which give rise to most of 



THE CONTRACT OF MARINE INSURANCE 103 

the disputes in regard to the interpretation of policies. The 
meaning of the printed form is well known, but who can know 
what will be the effect of some ill considered clause which is de- 
manded by an assured because he thinks it gives him increased 
protection. It may be so worded as to invalidate some of the 
printed or implied terms of all marine poUcies and leave him with 
less protection than he would have had with a policy in the 
usual form. 

The Intention of the Parties. Technical Words. — ^The in- 
tention of the parties to the contract should govern the meaning 
of the contract. Thi^ intention must be determined from the 
words as expressed. The words used may permit of more than 
one interpretation and it must be determined from the intention 
of the parties which of the several meanings was the one intended. 
PoUcies cannot be construed contrary to the fair meaning of the 
words and expression used, but if it can be clearly established that 
the words and expressions used do not embody the intention of 
the parties, the contract may be reformed so as to express such 
intention. The meaning of technical or peculiar words is pre- 
sumed to be the interpretation which those words have acquired 
by usage in similar commercial transactions. 

Extrinsic Evidence. — The question is often raised whether or 
not oral or written negotiations entered into before the formal 
written contract was executed, shall in any way be read into 
the contract to explain the intention of the parties. The com- 
mon rule and the only safe one to follow is that all negotiations 
prior to the issuance of the formal contract are waived and the 
poUcy as written and accepted by the assured stands as the em- 
bodiment of all the terms and conditions of the contract. It is, 
however, possible by reference, definite and descriptive, to make 
the poUcy subject to some extrinsic document containing material 
facts in connection with the risk. Such references are scrutinized 
with the greatest care and are admitted as evidence only where 
it is clearly the intention of both parties, that this parol evidence 
be admitted. Oral evidence is never admitted to vary the terms 
of a contract, but in some cases it may be received to explain 
the meaning of the words used. 

Does the Application Control the Policy? — ^The basis of the 
policy as already explained is the insurance application signed 



104 MARINE INSURANCE 

or initialed by both parties. The question naturally arises 
whether or not this application in any way controls the formal 
policy when issued. In the ordinary transaction an application 
is made on a form furnished by the underwriter, containing in 
part the printed clauses appearing on the policy, and in such a 
case the only conflict between policy and application would be a 
mistake in transferring the information on the application to 
the policy. Underwriters are usuaUy prompt in correcting 
such errors, and if they should object would be judicially com- 
pelled to make the correction. If, however, the application has 
been bound on a form prepared by the assured containing strange 
or unusual clauses, but the policy when issued is on the under- 
writer's customary form, then it is more difficult to determine 
whether or not the application can be read in to change the terms 
of the policy. As a matter of equity it seems fair that an 
underwriter should be bound by the appUcation which he signed; 
as a matter of pure law the question is doubtful. A court of 
equity would probably decree that the policy be changed to 
conform to the terms of the application, unless the underwriters 
could show that their attention was not directed to these strange 
and unusual clauses and that they had not noticed them. In 
such case it might be decreed that the minds of the parties had 
not met and that there was no vaUd contract. 

The Law of the Place. — It is a general rule of the law of con- 
tracts that an agreement is held to be made in accordance with 
the laws of the place where the contract is drawn up and is to 
be interpreted in conformity with such laws. This rule becomes 
important in the consideration of contracts made in one state or 
country but to be executed in another. It has been held by the 
Supreme Court of the United States that an insurance company 
can make contracts by mail and that such contracts are not 
amenable to the law of the State where the contract is to be 
executed. Several of the states have endeavored to bring such 
insurance contracts under their control for purposes of taxation, 
but the law would seem to be clear in this respect. This question 
often arises in connection with certificates issued under contracts 
of insurance, which certificates are not valid unless counter- 
signed by the assured who is domiciled in another state. If 
the issuance of such certificate is the actual making of the con- 



THE CONTRACT OF MARINE INSURANCE 105 

tract it would seem clear that the contract is subject to the laws 
of the state where the certificate is countersigned. Where, 
however, the countersignature of the certificate in no sense is 
the making of a contract, but is merely the validation of formal 
evidence of a contract already made, i.e., the open policy, it 
seems equally clear that the laws of the state where the open 
policy was issued control the contract. 

The CanceUation and Modification of Contracts. — Contracts 
of insurance being entered into by mutual agreement of the 
parties may be cancelled or modified only by their mutual 
consent. Such consent should be in writing and may be shown 
either by having a cancellation clause written across the original 
application and this clause signed or initialed by both the assured 
and the underwriter, or a regular form of cancellation (see ap- 
pendix, page, 372) may be filled out in dupUcate by the assured 
or his broker setting forth the reason for the cancellation and 
outlining the particulars of the original insurance so that no 
doubt may exist as to the insurance to which the request for 
cancellation refers. One copy of the cancellation notice is 
signed by the assured and retained by the underwriter and the 
other is signed by the underwriter and retained by the assured. 
If the policy has been issued, it is surrendered to the under- 
writer who then makes the necessary cancellation on his records. 
In some instances the cancellation clause may be written 
across the face of the policy, both parties signing it, although 
the policy itself is only signed by the underwriter. Altera- 
tions in the contract are similarly made. No writing on the 
policy other than such as is assented to and initialed by the under- 
writer is of any force or effect as against the underwriter, although 
it may result in voiding the contract with respect to the rights of 
the assured. When a contract has been made, but has not be- 
come operative, the assured may by preventing the commence- 
ment of the risk, in effect dissolve the contract. In no other 
way can the assured without the consent of the underwriter re- 
lease himself from his bargain. The underwriter on the other 
hand may prevent such a result by requiring the assured to 
agree that there shall be no return premium for cancellation or 
short interest. Such an agreement is justifiable because the 
underwriter by accepting insurance by a named vessel for one 



106 MARINE INSURANCE 

merchant restricts by that amount his underwriting capacity 
available for others. 

. The Assignment of Policies. Certificates. — ^The subject of 
the assignment of policies is one that is not altogether free from 
doubt. It is a general rule of law that a contract that does not 
involve the question of the parties themselves may be assigned, 
the assignee taking the place of the assignor with respect to the 
benefits and obligations of the contract. The decisions in regard 
to the assignment of policies are not all in agreement, but as a 
matter of principle, aside from the question of law, it does not 
seem just that an underwriter contracting with one person, 
should be forced without his consent into contractual relations 
with another. Of course, if the contract reads for account of 
''whom it may concern" as so many insurance poUcies do, there 
may be room for doubt as to the assignabihty of the policy, but 
even in this case if the assured is divested of his interest or his 
relation to the insured subject, there would seem to be consider- 
able doubt as to whether the contract should inure to the benefit 
of a third party. It is quite usual to avoid such question arising, 
to have inserted in policies, a clause making an assignment void 
unless assented to by the underwriter. However, even in the 
absence of such stipulation, it is prudent to have the underwriter 
assent to the assignment. Obviously, if loss is made payable to 
the assured or order, the underwriter agrees in advance to the 
payment of a loss to some undisclosed person, but nevertheless, 
it would seem that at the tirnie of the loss the assured must have 
had an insurable interest in the property. Insurance certificates, 
are issued for the purpose of transferring insurance and are quasi- 
negotiable. The insurance being transferred by endorsement, 
the holder of the certificate receives all the rights of the original 
assured, but also assumes all Kabilities that may have attached 
to the insurance, as for example UabiUty for unpaid premiums. 
Even this UabiUty is waived in many cases by underwriters who 
stipulate in the certificate, that with respect to a third party 
holder of the certificate aU UabiUty for unpaid premium is 
waived. 

Clarity Essential in the Writing of Policies. — ^The only safe 
rule to follow in the writing of insurance contracts is to have the 
facts in relation to the insurance so clearly set forth in the poUcy, 



THE CONTRACT OF MARINE INSURANCE 107 

that it is not necessary to have recourse to the rules of construc- 
tion for explanation. Inconsistencies should be reconciled and 
ambiguities clarified at the time of issuing the contract so that 
in the event of loss the only necessary acts to be performed will 
be the presentation of the proofs of loss, the adjustment of the 
claim and the drawing of the check in payment thereof. 



1 



CHAPTER 6 

THE POLICY. ASSURER AND ASSURED 

Types of Policies. — ^There are many types of policies in use in 
the insurance of marine and transportation risks. These 
various forms differ widely in much of their phraseology, yet all 
are merely the outgrowth and development of the original form 
of marine policy which has been in use for centuries. This fact 
will readily appear from an examination of the various types of 
policies in each of which will be found phrases and clauses com- 
mon to all. Among the various types of policies in use are those 
insuring cargoes both as individual risks, known as special 
policies, and under open contracts called floating policies. Special 
types of cargo policies are in use for the insurance of certain 
commodities such as cotton, grain or refrigerated products. 
Other types of cargo poUcies are seen in the blanket and transit 
floater policies which are in general use in connection with 
coastwise and inland marine insurance. The insurance of vessels, 
hull insurance as it is known, has developed various types of 
policies. Some of these are general in their appUcation being 
used for all kinds of hull risks, while others are limited in their 
scope. Thus general steamer forms, and those adapted to special 
trades as Great Lakes or River traffic are found, while in the 
insurance of sailing vessels, forms are provided for vessels de- 
pending for power on their sails alone and those equipped with 
auxiliary engines. Vessel forms are also in use for the insurance 
of port risks and for the insurance of vessels while being built 
or repaired. The insurance of freight, commissions, profits and 
other special interests requires special clauses which may be 
embodied in separate forms of policies or these interests may be 
insured under cargo forms containmg modifying clauses. There 
are also liability forms issued to the common carriers under 
which the insurable interest is not cargo, but the liability, either 
implied by law or assumed by contract, of the carriers for cargo 
in their custody. 

108 



THE POLICY, ASSURER AND ASSURED 109 

Form of Policy, — ^There is, in the United States, no standard 
form of policy required by law for use in connection with the 
issuance of marine insurance contracts. Each company, how- 
ever, has its own skeleton forms, differing from one another in 
regard to some words or expressions, but all essentially alike 
and closely following the forms of expression which have stood 
the test of time and have received judicial interpretation. The 
mere fact, however, that the skeleton forms of the various com- 
panies do differ, makes it necessary for the assured or his broker 
to have a thorough knowledge of the different forms in use, so 
that in accepting many policies of different companies, each 
covering part of the same risk, no conflict may exist between the 
several policies in the printed, written or stamped portions. 
The form of policy used as the basis of this explanation is the 
special cargo skeleton form in use by one of the New York 
companies, and is chosen because it has changed but little in the 
past seventy-five years and furnishes a good basis for the discus- 
sion of the underlying conditions of all marine insurance. The 
cargo form is taken because it is more used than the hull form, 
but the basic parts of policies used for hull, cargo and freight are 
alike. The modifications necessary for the insurance of these 
different interests will be discussed in their proper places. 

British Form of Policy. — The relations existing between the 
American and British marine insurance markets being so close, 
attention will be called from time to time to the salient differences 
between American and British pohcies. As already indicated 
the British marine insurance law has been codified, and in the 
Marine Insurance Act, 1906, is set forth in considerable detail 
the rules under which marine insiu*ance is written in Great Britain. 
No definite form of poUcy is required by the Act, but following 
it there is set forth the common Lloyd's form of policy with rules 
for its construction and this is the form in general use in Great 
Britain. (See Appendix p. 411.) 

The Asstirer. — Naturally the first item in the policy is the name 
of the Insurance Company, the party of the first part to the 
contract. Underwriting in the United States, as already ihdi- 
cated, is conducted almost exclusively by incorporated com- 
panies, acting through their duly elected officers or their ap- 
pointed agents. Individual underwriting has fallen into disuse. 

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MARINE INSURANCE 



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112 MARINE INSURANCE 

Our nearest approach to this system is found in the very few 
Lloyd's Associations, where individual underwriters severally 
underwrite a portion of the total line covered by a policy issued 
by their joint attorney. Even this modified form of individual 
underwriting is disappearing, regularly incorporated companies 
succeedmg the groups of individual assurers. The underwriting 
scope of a corporation is strictly limited by its charter, but 
ordinarily a company's activities are not confined to any one 
branch of insurance. Power is granted to them to do fire as well 
as marine insurance, and some companies have even a more 
general charter. In New York State, at least, the companies 
in regard to their marine business, are not limited with respect 
to the amount which they may carry on any one risk, but pru- 
dence naturally sets limits which ordinarily are much less than 
the legal restrictions in regard to fire and other forms of insurance. 

The Assured. — ^The name of the Assured follows the name of 
the Company. It should not be inferred that the person, firm or 
corporation named as the assured is necessarily the real party 
at interest, as insurance may be taken out in the name of an 
agent. However, a poUcy must be taken out in the name of a 
person, firm or corporation who dkectly or indirectly has an 
insurable interest. One who has such a vested, expected or 
contingent interest in the subject matter that he will be benefited 
by its preservation or injured by its loss or damage has an in- 
surable interest in that property. Only those interested in the 
subject matter at the commencement of the risk under the policy 
can be original parties to the poUcy and they continue to be 
parties only while they have an interest. The appointment of 
one person as the agent of another for the placing of insurance 
gives that person suflicient insurable interest in the property to 
enable him to effect insiurance in his own name as agent. A 
policy placed by an agent for a principal without the latter's 
consent, may be ratified and adopted by the principal at any 
time, even, it would seem after loss is known to have occurred. 
Insurance placed by agents will, however, be applied only to such 
principals as were intended at the time the insurance was 
effected. 

Insurable Interest Must be an Actual One. — ^The insurable 
interest must be such that the happening of any of the perils 



THE POLICY. ASSURER AND ASSURED 113 

insured against might directly effect the interest of the assured, 
rather than have merely a remote or consequential effect. For 
instance, the loss of a full cargo of grain might disturb the grain 
market, yet this fact would not give an insurable interest in 
the grain at risk to any except those who would be directly effected 
by the loss of that particular grain. This does not mean that 
one whose relation to the subject matter is conditional, does 
not have insurable interest, for an interest which is real and exists 
when the insiu-ance is applied for but may be defeated by the 
happening of some contingency is insurable. Such an interest, 
however, should be definitely described. Several different per- 
sons may have insurable interests in the same subject matter, 
each having a different interest, not conflicting with the interests 
of the others. However, a mere expectant interest in the sub- 
ject matter, not founded on any legal right or title does not give 
a person such an insm-able interest in property as may be covered 
by a poUcy of insurance. 

Extent of the Insurable Interest. — The insurable interest need 
not exist at the time the insurance contract is made. Merchants 
make contracts to automatically cover their future transactions, 
but it is essential to a recovery under the policy that the assured 
have an insurable interest at the time of the loss. While it has 
been stated that an insuifance policy insures the person and not 
the thing, the policy only protects the person with respect to his 
pecuniary interest in the thing itself. Without the existence of 
the thing and without a definite relation existing between the 
person and the thing no insurable interest exists. It is not 
necessary that the assured be interested to the extent of the whole 
value of the subject matter. Any interest, however slight, if 
definite and legal may be insured, as for instance the commissions 
which a commission merchant will earn if the goods arrive safely 
so that he can attend to their distribution. The number of 
insurable interests which exist with respect to the same subject 
matter may be nimierous, but the sum total of all the insurance 
on these various interests should not exceed the total pecuniary 
value of the property itself or the value contingent upon its 
continued existence. This sum should be the total amount 
recoverable in the event of the destruction of the subject matter 
of these various insurances. It should never be possible for 



114 MARINE INSURANCE 

two parties each to collect the value of the destroyed property. 
It is, therefore, necessary that the poUcies covering different in- 
terests do not overlap, otherwise double insurance will exist. 

Persons Who Have Insurable Interests. — ^Among the many 
classes of persons who may have an insurance interest in property, 
and who may therefore effect insurance in their own names, or those 
upon whose behalf valid insurance may be written in the name of 
a duly authorized agent, the following may be mentioned, i.e. 

Owners, — It is self-evident that he in whom the legal title is vested 
may insure the property. 

Managing Owners, — In many cases the ownership of sailing vessels 
and steamers is divided into sixty-four or it may be two hundred and 
fifty-six or some other number of shares. The individual owners may 
have no voice at all in the management of the vessel, but one of the part 
owners is intrusted by the others with the conduct of the property. 
To avoid detail, this managing owner, as he is called, may be charged 
with the duty of insuring the vessel and takes insurance in his own 
name for account of whom it may concern, an expression which will be 
presently explained, but in this particular case referring to himself 
and his co-owners. 

Mortgagee. — Commercial transactions are conducted largely on credit, 
and vessels, hke other forms of wealth, are often mortgaged for a con- 
siderable part of their value. The lender of money either on cargo or 
vessel has an insurable interest in the property to the amount of his 
loan, but may effect insurance for the full value for the benefit of all 
concerned. 

Consignee. — Goods are often shipped on consignment for sale, the 
property being at the risk of the consignee, the latter paying for the 
property not a fixed sum determined by an invoice but a definite per- 
centage of the proceeds. In such cases the consignee has an insurable 
interest to the extent of the full value of the goods. 

Factor or Commission Merchant. — Such persons have an insurable 
interest to the extent of their expected profits or commissions, if these be 
dependent on the continued existence and safety of the property. 

Trustee for Creditors. — The owner of property may become bankrupt 
or may make an assignment for the benefit of creditors, in which case 
the trustee in bankruptcy or the assignee obtains an insurable interest 
for the benefit of all concerned. 

Agent. — ^An agent, provided his authority is broad enough, always 
has such an insurable interest that he can take insurance in his own 
name, but the policy should set forth the agency. . 



THE POLICY, ASSURER AND ASSURED 115 

Charterer, — ^A vessel may be chartered under an agreement that the 
charterer assumes full responsibility for the vessel, as in the case of a 
bare ship charter." In such case the charterer has an insurable interest 
and may insure in his own name. The charterer always has an insurable 
interest in the earnings of the vessel, depending of course on the terms of 
the charter. The charterer also has an insurable interest on the 
"profits on charter" being the difference between the hire he pa3n5 for 
the use of the vessel and the amount he will earn by the carriage of goods 
under bill of lading. 

Repair Yard. — When a vessel is sent to a yard for repairs, the con- 
tractor may assmne responsibility for certain perils which may overtake 
the vessel while under his control. He therefore has an insurable 
interest in the vessel with respect to these perils. 

Common Carrier, — ^A common carrier transporting property is re- 
sponsible under the law for the safe delivery of the goods to the con- 
signee, except in so far as it may be relieved of this responsibility by 
law, as in the case of the "Harter Act," with respect to ocean commerce. 
For an increased rate a carrier may agree to assume liability for loss 
caused by risks for which he is not legally responsible or he may agree, 
upon the order of the shipper or consignee, to procure insurance on the 
property while in transit over his lines or those of connecting carriers. 
A carrier therefore by virtue of his legal responsibility or his assumed 
responsibility has a valid insurable interest in the property in his 
custody. 

Bottomry and Respondentia. — ^The lender under a bottomry or re- 
spondentia bond has an insurable interest in the property to the extent 
of his loan, since in the event of the loss of the property the debtor 
will be discharged from his obligation to repay the loan. 

The borrower under a bottomry or respondentia bond also has an 
insurable interest, but only for the amount by which the value of the 
property exceeds the amount borrowed, since in the event of loss he will 
not suffer with respect to the amount borrowed, this loss falling on the 
lender. If, however, the bond provides that the borrower shall be 
discharged from his debt only in the event of loss caused by certain 
specified perils, he has an insurable interest to the full value of the 
property against all other perils. 

Bottomry and Respondentia loans are very rare in modem prac- 
tice and are confined to loans made at a port of refuge to pay for dis- 
bursements made to enable the vessel to continue her voyage. The loan 
is made to the master of the vessel on the security of the vessel or the 
cargo or both, and does not as a practical matter affect the insurable 
interest of the hull or cargo owner. 

Reinsurance. — ^An underwriter having assumed the risks to which 



116 MARINE INSURANCE 

the aMured's property is subject, has a valid insurable interest in such 
property, and may reduce his liability by reinsuring the whole or any 
part of it against all or part of the risks for which he has assumed 
liability. The original assured, however, has no right to or interest in 
such reinsurance. 

"For Account of." — ^No part of the marine insurance policy is 
more important or requires greater care in its wording than does 
the phrase following the name of the assured and reading "for 
account of. " In this blank space should be inserted by name or 
by description all the parties who are interested in the insured 
subject. In the case of individual or special insurance the 
problem is often very simple as the assured may desire the pro- 
tection to be merely for account of himself, no third party or 
parties being interested in the transaction. Where, however, an 
open contract is desired which will cover all property which may 
be received by a merchant the most careful wording is necessary 
in order to make the contract cover all the property in which the 
merchant, as owner, or as consignee with orders to insure, is in- 
terested, or for which he may be directly or indirectly responsible. 
It is squally important that the policy be not made "a catch all" 
apparently covering property to which the relation of the assured 
is not clearly defined. It often happens that a merchant will 
wish to cover under an open or floating poUcy only a portion of 
the merchandise which may be shipped to him, or only such goods 
as may be shipped under special conditions, as for instance 
merchandise purchased under letters of credit issued by a named 
bank. In such circumstances it is necessary that the floating 
policy be so worded as to provide for nothing but the shipments 
on which insurance is desired. A considerable degree of skill 
is required to so word this portion of the policy that dispute will 
not arise in determining whether the assured is entitled to 
receive reimbursement for a loss which may have occurred, 
or whether the underwriter is entitled to premium on risks which 
the assured has failed to declare. 

Attachment of Policy. — As the question of the passing of title 
is often one of considerable importance and may be difiicult of 
proof, it is, in many cases, prudent to insert at this point in the 
policy, a definite description of the time at which the policy will 
attach. For instance, in the raw sugar trade the policy may be 



THE POLICY. ASSURER AND ASSURED 117 

made to attach when the sugar is bagged and set aside for the 
assured, while in the raw cotton trade it may be made to attach 
"from the moment the cotton becomes the property of the assured 
or legally at their risk, provided, however, that no cotton shall be 
covered hereunder prior to actual deUvery to the assured or their 
agents, unless specifically identified by marks and numbers or 
other designation in possession of the assured or mailed to the 
assured prior to loss.'' 

Description of Insurable Interest Should be Defimte. — If the 
assured wishes to cover property of -others which he may be or- 
dered to insure, provision should be made that such orders 
be in writing and mailed to the assured prior to the time the ship- 
ment is made. Underwriters, by insisting on a careful descrip- 
tion of the interested parties and of the time at which the goods 
are to come imder the protection of the policy, are not endeavor- 
ing to insert technicalities of which they can avail themselves to 
avoid payment of loss. They are merely trying to so word their 
policies that there may be no question of the risks for which they 
are liable to the assured and of the premiums for which the as- 
sured are liable to the underwriters. Too often the assured, per- 
haps through an honest mistake, has failed to declare risks to 
underwriters and to pay premiums thereon, but in the event of 
loss on a similar risk he has made a claim imder the poUcy and 
insisted on payment of the loss. In such cases, of course, pay- 
ment of the premimn on the imreported risks can be claimed by 
the underwriter, but where a loss does not reveal the mistake or 
omission the underwriter suffers. It is only by the continuous 
flow of premium to the underwriter that he can respond for losses, 
and policies should be so clearly drawn that no doubt can exist 
in the mind of either the assured or the underwriter of their 
respective duties and Uabilities. 

An Insurable Interest Must Exist. — There is another problem 
in connection with the description of the assured which cannot 
be ignored in view of the revelations of unfair dealing in the 
procurement of marine insurance policies which are still fresh in 
the pubUc mind. It formerly was possible in New York State, 
at least, for a broker or ship agent to contract for large amounts 
of insm*ance on cargo by a named vessel when the so-called 
assured had no property at risk, and had no intention of shipping 



_A 



118 MARINE INSURANCE 

goods by the vessel in question. Having obtained advance 
information that a certain steamer was to load for a port for 
which freight space was in great demand, this broker or ship 
agent would enter the marine market and bind at low rates all 
the available underwriting capacity. When the vessel arrived 
and began to load her cargo the legitimate shipper would dis- 
cover that the market was "full,'* as it is known, by this vessel. 
The broker who had bought up the market would then approach 
the shipper offering to transfer insurance to him at a rate greatly 
in advance of the original rate charged by the underwriter. 
Such practices were obviously unfair and- could have been 
prevented in large measure had underwriters insisted on having 
insurance placed only in the names of legitimate shippers who 
had definite freight engagements for the vessel named. The 
law of New York has since been amended making it unlawful 
to issue insurance to anyone who does not have a vaUd insurable 
interest and also making it unlawful for anyone who does not 
have a vaUd insurable interest to apply for insurance. It also 
becomes unlawful to transfer insurance at a rate higher than its 
original cost unless the buyer is informed of the original rate and 
consents to pay the higher charge. While this law has done 
much to correct the improper practices which have crept into the 
marine insurance business in New York it does not correct similar 
abuses which may be practised in other states. Underwriters 
by issuing policies to only those whom they know to be legitimate 
shippers or authorized brokers can most effectually stamp out 
these improper practices. In Great Britain underwriters have 
been imposed upon in the same way and now insist that the names 
of the real parties in interest be declared when msurances are 
made binding. The wording of the Lloyd's poUcy (see appendix, 
p. 411) is so indefinite and comprehensive with respect to the 
persons insured that underwriters have readily been imposed 
upon by those who sought unlawfully to "corner the insurance 
market." 

Whom It May ConcQm. — ^Before passing from the subject of 
the assured, reference must be made to an expression common 
to most marine policies which leads to some confusion in deter- 
mining the actual parties at interest. This expression "for ac- 
count of whom it may concern " is somewhat pecuUar to American 



THE POLICY. ASSURER AND ASSURED 119 

policies but similar expressions are found in English and Conti« 
nental insurance contracts. The original purpose of these ex- 
pressions is doubtful, but as Emerigon, the French author, 
suggests they may have been introduced in order to conceal the 
identity of the real party at interest and to keep his commercial 
enterprises secret. However, their use caused English under- 
writers in the eighteenth century to complain "that poUcies 
were so loose that an underwriter had no opportunity of knowing 
who the persons were for whom he insured." A statute accord- 
ingly was passed setting forth how the assured should be de- 
scribed in the poUcy, and an underwriter promptly took advan- 
tage of the law in declining payment under a policy issued in the 
name of an agent who was not described as such. Other similar 
cases occurred and a new statute was enacted virtually repealing 
the former. The use of these expressions is now firmly estab- 
lished and their meaning is well understood. 

"Whom It may Concern" is not All Inclusive. — The expression 
"for account of whom it may concern" has not the all-inclusive 
meaning the words would indicate. Phillips states that a policy 
written with these words or "any equivalent clause, wiU be 
applied to the interest of the party or parties, and only the party 
or parties, for whom it is intended by the person who effects or 
orders it, if such party has authorized its being made beforehand, 
or subsequently adopts it."^ The use of this expression, which is 
a technical one, presupposes an agency, and refers to only the 
person or persons whom the agent had in contemplation when he 
effected the insurance. Such person or persons are the "con- 
cerned" in the transaction, and not all persons who might 
possibly have an interest in the subject matter of the insurance. 
It is not essential that these parties be definitely known to the 
assured, but they must be embraced within a certain class of per- 
sons for whose account the assured intended to effect insurance. 

"Trading with the Enemy." — ^The entrance of this country into 
the World War and the passing of the " Trading with the Enemy " 
act presented a new problem with respQct to this expression. It 
might happen that some of the persons intefided to be included 
by the assured under the general words "whom it may concern" 
were alien enemies of the government, or persons who were in- 

* Phillips on "The Law of Insurance/' Section 383. 



120 MARINE INSURANCE 

eluded within the terms of the Act and who were, or should 
have been placed on the proscribed list by the United States 
Government. It is doubtful whether or not the government 
would hold an insurance company responsible for innocently 
granting insurance under the cover of "whom it may concern" 
to persons coming within the terms of such an act. Under- 
writers during the late war in order to preclude such a possibility, 
and to aflirmatively show that it was their intention to observe 
the letter as well as the spirit of the law inserted in their policies 
clauses which had the effect of excluding from the protection of 
the policy any person or persons who might come within the 
meaning of the Act. One form of this clause, which it will be 
observed also included the restrictive trading acts of Great 
Britain, read: 

" Warranted not to cover the interest of any partnership, corpora- 
tion, association or person, insurance for whose account would be 
contrary to the Trading with the Enemy acts or other statutes or 
prohibitions of the United States and/or British Governments." 

The Payee of Loss. — In the policy form under consideration 
the wording continues: "In case of loss, to be paid in funds 
current in the United States, or in the city of New York to 

." Ordinarily a policy is made payable to 

the assured or order ,^ but loss may be made payable to any in- 
terested third party or parties. On shipments which are financed 
under letters of credit it is customary to have the loss made 
payable to the issuing bank in order that its advances on the 
shipment may be protected. In the case of hull insurance 
where there is a mortgage the loss is usually made payable to 
the mortgagee and the assured "as their respective interests 
may appear. " The expression "as their interests may appear, " 
while in general use, is technically objectionable in that it may 
put on the underwriter the burden of deciding what the respective 
interests of the parties are. However, in case of a dispute it 
would be possible for the imderwriter to pay into court the 
amount of the loss, and permit the claimants to settle their 
differences there. It must of course be remembered that in order 
to establish a vaUd claim for loss certain documentary evidence 
must be presented showing that such loss has actually occurred 



THE POLICY. ASSURER AND ASSURED 121 

and that the claimant is entitled to payment of the amount due 
under the policy. These proofs of loss will be considered in a 
later chapter. 

The Insurance Certificate Transfers the Payment of Loss. — 
In the last twenty-five years the insurance certificate has largely 
supplanted the policy in connection with the negotiation of 
documents relating to cargo shipments. The use of this cer- 
tificate has already been explained, but its consideration at this 
point is pertinent, since its purpose is primarily to transfer 
to the holder the benefit of the insurance which, in the event of 
loss, is the right to claim the indemnity which the insurance 
provides. As most merchants have open policies covering all 
shipments which are at their risk, the insurance certificate 
provides a simple and convenient method of evidencing the 
insurance and of making possible the payment of loss to the 
bona-fide holder of the commercial documents. These cer- 
tificates, when negotiable, provide that loss shall be payable to a 
designated person or order, these last two words enabling the 
payee by simply signing his name across the back of the certificate 
to transfer the payment of loss. This he may do in one of two 
ways, either he may specially transfer the certificate by endorsing 

it "Pay to the order of '' inserting some definite 

name, or the payee may by merely signing his name make the 
instrument a so-called "bearer'' document. In the first case 
loss will be payable only to the person indicated or one to whom 
he may order the loss payable, in the second case any person 
producing the certificate with the supporting documentary 
evidence of ownership and loss would be entitled to payment. 
By the omission of the words "or order" or "to the order of" 
the endorser can destroy the negotiability of the document, it 
being transferable from that time on, only by assignment. 

Loss may be Made Payable in Foreign Countries. — The 
custom of providing that loss may be payable in foreign coun- 
tries, while essential in the conduct of commerce, is not a new 
departure as this method was in vogue At least as early as the 
sixteenth centiuy. Underwriters carry funds in the larger 
banking centers and have arrangements in smaller cities by which 
drafts drawn on them are honored by some local bank. This 
enables the holders of certificates after proper adjustment has 



122 . MARINE INSURANCE 

b^en made by the local representative of the underwriters to 
receive prompt payment and thus to be put in funds to continue 
their commercial transactions. Were it necessary in each case 
to return the certificate and other loss papers^ to the underwriter 
for payment, often months would elapse before the holder of the 
certificate could, in the ordinary course of the mail, receive 
reimbursement for his loss. 

Loss Orders. — After a loss has been adjusted and the imder- 
writer has admitted Uability, the payee specified in the policy 
or the payee under the certificate if one has been issued, may by a 
written order in proper form instruct the underwriter to pay the 
loss to some third party. Such orders are principally used in 
connection with poUcies in which the loss is payable to a bank to 
protect its advances on the shipment, and these advances having 
been paid by the assured, the bank is out of the transaction and 
quite willing that the loss should be paid to the assured. To 
accomplish this end a formal order of payment is executed by the 
bank. 

Open or Floating Policies. — It may be well at this point to 
give consideration to the subject of open or floating poUcies. 
The word open in connection with marine insurance contracts 
has a double meaning. Sometimes it is used to describe the 
insurance on a specific risk where the exact amount needed has 
not been determined and the transaction is, therefore, an open 
or uncompleted agreement. A broader meaning, which, however, 
is merely an enlargement of the primary definition, is given to the 
term when used in coimection with floating policies. These poUcies 
are contracts which may be issued for a definite or indefinite 
period of time, there being no restriction in New York as to the 
duration of a marine poUcy and cover the assured with respect 
to all his shipments as described in the poUcy within the named 
geographical limits. Amounts applicable to the contract are 
to be reported from time to time as information of shipments 
is received, and therefore are open. Such poUcies usually have a 
limit of UabiUty on any one risk, bxft the actual amounts on which 
premium is to be paid while undetermined, are definitely con- 
troUed by the limit of UabiUty and by the valuation clause to 
which reference will be made later. The open or floating poUcies, 
covering as they do all goods as described which may be afloat, 



THE POLICY. ASSURER AND ASSURED 123 

make possible the great commercial transactions of the present 
day. Were it necessary to specially insure in advance each 
individual shipment, commerce on its present gigantic scale 
would be impossible since in many cases goods are shipped 
and may even have arrived before the assured has knowl- 
edge that property at his risk has been exposed to the perils of 
transportation. 

Blanket Policies. — However, the distinction cannot be too 
closely drawn between poUcies of this character and the so-called 
blanket poUcies which are similar in their nature, but entirely 
different in their mode of operation. The purpose of the blanket 
policy is similar to that of the floating policy but is a closed 
instead of an open contract. The blanket policy describes the 
geographical and time limits of the contract, the payee of loss and 
the kind of goods to be insm*ed and always has a fixed limit of 
liability on any one vessel or in any one location at one time. 
The principal distinction, between the floating policy and the 
blanket policy is that in the former type of contract the assured 
pays the premium on the actual amounts at risk, while under the 
latter form a limip sum premium is charged. This premium is 
based on the estimated total amount which will come under the 
protection of the poUcy during the contract term, and may be 
subject to readjustment at the end of the term, by the payment 
of an additional premium at a fixed rate if the books of the as- 
sured indicate that an amount greater than that estimated came 
under the protection of the policy. By the same terms of agree- 
naent a return premium may be made at a fixed rate if the actual 
amoimt at risk fell below the estimated amount. Usually these 
policies contain a provision that if loss is paid the poUcy must be 
reinstated for the amount of the loss, by the payment pro-rata 
of the annual premium on the amount so paid for the unexpired 
period of the policy. This reinstatement clause may make such 
poUcies very costly if an assured unfortunately has a series of 
losses. 

Advantages of Blanket Policies. — ^From his point of view a 
blanket poUcy properly worded has the advantage of securing 
to the underwriter the premium for the risks which he assumes. 
Too often, in the case of floating poUcies the assured forgets to 
report shipments appUcable to the poUcy, or has the mistaken 



124 MARINE INSURANCE 

notion that it is only necessary to report shipments on which loss 
has actually occurred, forgetting that the underwriter is entitled 
to premium on every dollar which has been at risk under the 
poUcy. Under the blanket form the assured avoids the necessity 
of making these detailed reports of shipments applicable to the 
policy. 

Transit Floaters. — ^Blanket policies under the name of "transit 
floaters" are in common use to cover local shipments made by 
merchants where it would be impracticable to make specific 
reports of the individual items. These poUcies are also fre- 
quently used by "common carriers" to protect shipments moving 
over their lines. Policies in which the interest insured is the 
liabiUty of a common carrier for loss suffered to property in 
his custody are sometimes issued. The subject of insurance 
is not the property itself but the UabiUty of the carrier whether 
this be implied by law or assumed by contract. Such a poUcy 
is unvalued, the responsibility of the underwriter being limited 
only by the amount expressed in the poUcy and not by the value 
of the property to which the Uability relates. The great bulk 
of cargo insurance, especially in the overseas trade, is written 
in the form of the open or floating policies or as they are called 
in Great Britain, "permanent covers." It is worthy of note that 
the Marine Insurance Act of Great Britain Umits the term for 
which a poUcy may be written to one year, and that owing to 
the "Stamp Act" these "permanent covers" are merely agree- 
ments on the part of the underwriters to cover the shipments 
described and to issue properly stamped evidence of the individ- 
ual insurances when declarations of amounts are made. 



CHAPTER 7 
THE POLICY (CorUinued.) THE TERMINI 

Lost or Not Lost. — ^Af ter laying such great stress on the fact 
that to have a valid insurance there must be an insurable interest, 
that is a subject matter to which the assured bears such a rela- 
tion that he will be benefited by its continued eyistence or injured 
by its damage or destruction, it is somewhat disconcerting 

to find the following words in the policv form. 'Do ^make 

insurance, and caus e ■ ' ■ ^to be insured, lost or 

not lost/' If the subject matter is lost there would seem to be 
no insurable interest, but it must be remembered that the 
assured and his underwriters can incorporate into the policy any 
conditions which are legal. Were the subject matter known to 
either party to have been lost, a policy issued with respect to it 
would then be void. There must, therefore, be read into this 
phrase the words ''without the knowledge of either party." 

"Lost or Not Lost" a Necessary Condition. — The words "lost 
or not lost'' were first introduced into the policy in 1613 but 
their use has become so general that they are now found in 
practically all forms. The reason for the use of this clause is 
obvious. A merchant ordering goods from a distant place may 
experience delay in obtaining information as to the shipment. 
When advices are received the vessel may have sailed and in 
fact may have been lost. Were the merchant to insure the goods 
under a poUcy not containing these words, and the underwriter 
could establish that at the time the poUcy was issued the goods 
were damaged or had ceased to exist, payment of loss could be 
resisted on the ground that there was no insurable interest to 
the extent of the damage or loss. Such a situation would be 
intolerable in mercantile transactions, and over three hundred 
years ago, when the means of communication between countries 
were very crude, this provision was first incorporated in the 
policy form. Of course, these words can be construed only in the 
10 125 



126 MARINE INSURANCE 

light of that underlying principle of all marine insurance namely 
that the utmost good faith must exist between the assured and 
the underwriter. If the assured knows that disaster has over- 
taken the vessel or its cargo, the concealment of this knowledge 
would amoimt to fraud and the insurance would be void. In the 
absence of such knowledge, this clause permits the valid insurance 
of goods or vessel which at the time of insurance may be lost 
or damaged. It sometimes happens that the merchant or his 
underwriter may have heard rumors that disaster has overtaken 
the venture, but by mutual consent the assured warrants that 
the property was in good safety on a given date and in the event 
of loss the assured can recover if it can be estabUshed that at 
any time on that particular day the venture was in existence 
and undamaged. On the other hand it may be known that dis- 
aster has overtaken the venture, but the extent of the damage 
or loss is imknown. The assured, however, wishes the remnant 
of his property then existmg to be insured, and the underwriter 
who is willing to assume such a risk will insert a warranty of the 
following tenor, i,e,, "Warranted free from loss, damage, injury 

or expense arising out of casualty of " inserting in the blank 

space the date of the disaster. This makes the underwriter 
liable for damage caused by a new casualty, but not for that 
resulting directly or indirectly from the original disaster. 

The Termini. — The words "at and from" follow "lost or not 
lost " in the form, and a blank space is provided in which is inserted 
the geographical or time limits of the policy. These limits are 
known as the termini of the insurance, the termim^ a quo being 
the place or time of the inception of the risk, the terminiLS ad quern 
the place or time of the termination of the risk. No insurance 
policy is valid unless these termini are mentioned. The terminus 
a quo must be specifically indicated, the terminus ad quern may 
be subject to determination as in the case of a floating policy 
wherein the time of the termination of the contract is not stated, 
because the policy, though being continuous, may be terminated 
by either party's giving notice of cancellation as provided in the 
contract. In the case of floating policies, however, the geograph- 
ical termini are definitely described. In these policies and usually 
in the case of hull insurances on time, both geographical and time 
limits appear in the terms of agreement. 



THE POLICY. THE TERMINI 127 

The Subject Matter of Insurance. — The policy continues 
'* upon all kinds of lawful goods and merchandises." The subject 
matter of the insurance must be distinctly set forth. If the 
poUcy is on a specific lot of goods the property should be de- 
scribed by marks and numbers if possible — ^the number of 
packages and kind of goods at least should be noted. In floating 
policies general words are used such as goods, cargo, merchandise, 
but in the declarations of shipments under the policy a definite 
description of the kind and quantity of goods is given. In 
cases where certificates of insurance are issued it is very im- 
portant that the description of the goods be exact, so that the 
property covered by the certificate will fit the description of 
the goods for which the corresponding biU of lading is issued. 
If the policy covers only a part interest in the insured subject 
such fact should be noted at this point in the policy, as for 
instance on one-haK interest in 100 Bales Cotton marked "Kite." 
While the printed words in the policy are general in their 
meaning and would cover any goods, it is customary to insert 
in the blank space preceding these words the definite de- 
scription of the property. The word "lawful" found in the 
printed form is inserted merely to protect the underwriter 
from the inclusion, under general words, of property not law- 
ful to be traded in and does not necessarily refer to contraband 
of war. 

Goods Presumed to be Laden under Deck. — It is a well under- 
stood and well estabUshed rule of marine insurance that goods 
are presumed to be shipped under deck, that is below the weather 
deck of the vessel. If the goods are shipped on deck they are 
not covered by the poUcy imless special notice of the stowage is 
given to the underwriter and he accepts the enhanced risk. 
The reason for this presumption is apparent. The deck of 
a vessel is not designed to carry goods. Its primary function 
is to make the holds watertight and to protect the cargo laden 
in the holds. Goods carried on deck are subject to weather 
damage, sea damage and to the hazard of being washed overboard. 
Shipowners have no legal right to load goods ondeckandif they do 
so, such goods are at the shipowner's risk unless he has obtained 
the consent of the cargo owner to such stowage. Accordingly 
underwriters cannot be expected without special notice to assume 



128 MARINE INSURANCE 

the risk of goods laden on deck and will be released from their 
contract if the insured subject is so loaded. There are certain 
cases, however, which may furnish an exception to this rule. 
Certain kinds of goods, dangerous in themselves, are by custom 
and sometimes by law, required to be shipped on deck, so that 
they will not endanger the other cargo and can, if necessity 
arises, be quickly thrown overboard. Underwriters are pre- 
sumed to know of these customs and legal requirements. If, 
therefore, an underwriter accepts a risk on one of these special 
commodities and the assiu'ed does not specify that the property 
was shipped on deck, the underwriter might be precluded from 
urging that the insurance was invalid because the property was 
laden on deck. Either the custom of carrying such goods on 
deck or a legal requirement necessitating such stowage would 
have to be clearly shown, in order to create such a presumption of 
knowledge on the part of the underwriter. Some insiu'ance 
companies in order to avoid such possible questions, specifically 
state in the printed form that the policy does not cover goods 
carried on deck, but if specially insured on deck are subject 
to special conditions relieving the underwriter from inevitable 
losses resulting from such stowage. 

Some Kinds of Property Should be Specifically Mentioned. — 
There are other kinds of property which are not included in the 
general words goods and merchandises, and among these may be 
mentioned livestock and goods shipped in refrigerators. Live- 
stock such as horses and cattle must be specially declared to an 
underwriter, since the special hazards to which such property is 
subject could not be presumed to be in the contemplation of an 
underwriter when he accepted insurance on goods and merchan- 
dise. The same remarks will apply to shipments of refrigerated 
and frozen goods such as meats, poultry, fish and game. When 
marine insurance was first devised and when the printed form 
of policy was first adopted, the modern method of preserving 
perishable articles by refrigeration was unknown. Question 
has also been raised as to whether or not specie, bullion and 
securities and like articles come within the scope of the general 
words. The surest rule to follow is to specifically describe 
the property to be insured so that no doubt of the intention of 
the parties may exist. If the insurance is on hull, profits, 



THE POLICY. THE TERMINI 129 

commissions, or freight the interest to be insured and the subject 
matter to which it refers should be adequately described. 

The Vessel and Its Master. — The printed form of policy 
continues: 

''laden or to be laden on board the good called the 

whereof is master for the present voyage or 

whoever else shall go for master in the said vessel, or by whatever other 
name or names the said vessel, or the master thereof, is or shall be 
named or called." 

These are quaint words referring to matters which are of vital 
importance to the risk, but some of the blank spaces are rarely 
filled in when the policy is issued. The name of the carrying 
vessel is of course mentioned, but while it has been pointed out 
that much depends on the experience and skill of the master it 
seldom happens that his name appears in the space provided. 
The words "laden or to be laden" do not refer to the attachment 
of the risk but are descriptive of "lawful goods and merchandises" 
which are "laden or to be laden on the good ship Atlas" for in- 
stance. The word good is not a warranty that the vessel is 
seaworthy, but is merely a descriptive adjective. There is, how- 
ever, an implied warranty of seaworthiness to which reference 
will be made (see p. 174). The name of the vessel is of the 
utmost importance because this is really the crux of the whole 
insm-ance. The underwriter's willingness or unwillingness to 
write the risk is dependent in large part on the suitability of the 
proposed vessel for the voyage to be run and no other vessel can 
be substituted without the consent of the underwriter. The 
name of the vessel may be changed, the master may be changed, 
but the vessel itself cannot be changed without voiding the 
insurance. It will be noticed that it is not sufficient to give 
merely the name of the vessel, a description of her iypQ must be 
given such as ship, steamer, motor vessel, auxiliary sailing 
vessel, etc., so that the underwriter may be able to identify the 
particular vessel intended. 

The Attachment of the Risk. — ^The name of the assured, the 
payee of loss, the description of the voyage and the name of the 
vessel having been set forth, the next paragraph of the form tells 
when the risk attaches and how long it endures. It also intro- 



130 MARINE INSURANCE 

duces some fine points of interpretation. The first sentence of 
this paragraph reads: 

*' Beginning the adventure upon the said goods and merchandises, from 
and immediately following the loading thereof on board of the said vessel, 

at as aforesaid, and so shall continue and endure until the 

said goods and merchandises shall be safely landed at as 

aforesaid." 

It should be remembered that a policy of marine insurance is 
a transit policy and it should cover goods only while in course of 
transportation and while out of the custody of the owner. It 
must also be noted that, notwithstanding the provision given 
above for the attachment of the risk, the policy will be of no effect 
until the assured has an insurable interest, and while it cannot, 
under the wording given, attach imtil the actual loading on board 
the said vessel, it will not attach then unless the insiu'able interest 
exists. 

Date of Attachment — ^The wording of this form of course 
refers to cargo insurances insiu*ed on special voyages. Hull 
policies which are in many cases written on time as it is known, 
attach from the day and hour named in the policy, but if no hour 
is named the poUcy will attach from midnight of the day before. 
It is customary for an hour to be named and to make certain what 
hour is intended the standard time of some named place is used 
as "noon Washington Time." Floating poUcies on caxgo are 
written to attach from a named date. The policy, as a contract 
"covers all shipments as herein described made on and after" 
the date indicated, but the insurance on each individual shipment 
made under the policy, will attach only in accordance with the 
printed form that is, "immediately following the loading on 
board" the specific vessel, unless the policy has been so worded 
as to provide an earlier point of attachment, as under the ware- 
house to warehouse form to which reference will be made. 

The Time of Attachment — The words "from and inune- 
diately following" give the barest form of protection and as 
the words imply will provide insurance only from the actual 
loading of the goods. What constitutes actual loading has been 
a matter of some controversy, but it seems to be a well-settled 
principle that from the moment the slings of the vessel lift the 



THE POLICY. THE TERMINI 131 

goods clear of the wharf or other place of deposit, the risk at- 
taches. If on the other hand the goods are lifted on to the vessel 
by the slings of a delivering lighter or by a derrick on the wharf 
it would seem to be equally clear that there is no loading until 
the sUngs have released the goods on the deck or in the hold of 
the vessel. In case the terminus a quo is a port or place where it 
is customary or in fact necessary that goods be lightered from 
the shore to the vessel, as is the case at some ports or roadsteads 
along the West Coast of South America, doubt may arise 
as to what the word "laden on board" means. It has been held 
in certain instances that "laden on board" means laden on board 
the vessel carrying the goods from the shore where the loading 
conditions have required this mode of transit. Such decisions 
would seem, however, to read into a policy a risk which may not 
have been contemplated or desired by the underwriter. If such 
lighterage risk is to be included, provision therefor should be 
made, as is done in the ordinary form of craft clause, reading: 

"Including risk of craft, raft, and/or lighter to and from the vessel. 
Each craft, raft, and/or lighter to be deemed a separate insurance. 
The assured are not to be prejudiced by any agreement exempting 
lightermen from liability." 

In England this question is settled, as in the rules of construc- 
tion accompanying the Marine Insurance Act, it is held that 
where goods are insured "from the loading thereof" the risk 
does not attach until such goods are actually on board, and that 
the insurer is not Uable for them while in transit from the shore 
to the ship. 
Insured Until Safely Landed. — As the insurance continues until 

the goods shall be safely landed at the terminus 

ad quern, the same question arises to determine whether or not 
deUvery into a Ughter or other shore vessel constitutes a safe 
landing. The answer to this question depends on the hydro- 
graphic character and the custom of the port and a safe landing 
will not have been accomplished until the goods have been landed 
in the customary manner and within a reasonable time after 
arrival at the port. This of course, means that if the only method 
of landing merchandise is by lighters or surf boats, the risk will 



132 MARINE INSURANCE 

continue in such craft until the property is deposited in a safe 
place on shore. If discharge were made into a floating receiving 
hulk; and this were the customary place of discharge a safe 
delivery would have been made. The facts in each particular 
case will control, though borderline cases will arise where it 
will be difficult to determine when the risk under the policy 
ceases. 

Warehouse to Warehouse Clause. — Obviously, the protection 
afforded by the printed form of policy is the minimum. That 
it leaves many risks iminsured is apparent and it is, therefore, 
not strange that various clauses have been devised to enlarge 
its scope. One of the broadest and perhaps the most usual 
form of protection afforded in the case of cargo insurance is that 
of the so-called "warehouse to warehouse'' clause. This clause 
does not by any means represent the extreme limit to which 
underwriters go in the insurance of cargo, since policies are 
written covering raw materials right from the farm or from the 
mine or forest. Insurance poUcies have in some cases been so 
broadened that they covered agricultural products while growing 
in the field and wool while it was still on the back of the sheep. 
Such poUcies go far beyond the bounds of transit insurance, the 
"warehouse to warehouse" clause representing practically the 
utmost limits to which transportation insxurance should be 
extended. 

At and From. — ^Between the restricted protection afforded by 
the printed form, and the broad coverage granted in the ware- 
house to warehouse clause, many intermediate forms of insurance 
are found. The policy reads "at and from" but these words 
merely indicate that the insurance attaches when the goods are 
loaded on the vessel at the port and continues there until the 
vessel sails when the word " from " becomes effective. The words 
"at and from" can only be construed in connection with the 
other words of the contract. Under modern insurance practice 
question is more apt to arise as to the meaning of the words 
"at and from" in connection with hull insiurance written on the 
voyage basis. 

Attachment of Cargo Insurance. — Often policies will be worded 
to attach when the goods are receipted for by the transportation 
company, in which case dock insurance is provided. Such pro- 



THE POLICY. THE TERMINI 133 

tection may have a time limit in order to guard the underwriter 
against a long wharf risk. Likewise at the point of destination 
the insurance may be continued for a stated period after dis- 
charge from the steamer or lighter, or it may cover in custom 
stores or other places of deposit for definite periods awaiting 
acceptance by the consignees The granting of such extended 
shore risks, however, should be closely watched as an under- 
writer may thus assume risks, which, because of congestion, may 
greatly exceed his carrying capacity. Clauses of this description 
may also grant protection much beyond that afforded in the ordi- 
nary "warehouse to warehouse'' clause. Since under the latter 
form the risk ceases when the goods are delivered into any 
store or warehouse at destination, whereas the shore insurance 
on time, if not restricted by modifying words such as "for thirty 
days unless sooner warehoused,'' may give the underwriter 
an extended risk in an undesirable place of storage after transit 
has ceased. 

Risk after Discharge from Vessel. — It is important to observe 
a distinction in meaning between a policy reading, "including 
the risk on the wharf after discharge from the steamer for not 

exceeding days, commencmg upon discharge," and one 

reading "including the risk on the wharf for not exceeding 

days after commencement of discharge." In the first policy the 
specific time on the wharf begins to run from the moment each 
individual package is discharged, a moment m most cases difficult 
of determination; whereas in the second policy the time begins 
to run from the moment the vessel begins to discharge or "breaks 
bulk" as it is known, the time of discharge of the particular 
goods insured under the pohcy being of no consequence. 

Attachment of Hull Risks on Time. — To determinate the 
point of attachment on huU insurance presents some peculiar 
difficulties. If the insurance is written on time, the point of 
attachment is of coiu^e determined. In such cases it is usually 
presumed that the vessel is in port and in good safety but this 
is not necessarily so. When single vessel risks are under con- 
sideration it should be insisted that the vessel be in port and in 
good safety at the date of the attachment. This requirement im- 
poses no hardship on the assured, as all hull time policies contain 
a clause similar in import to the following: 



134 MARINE INSURANCE 

''Should the vessel at the expiration of this policy be at sea, or in 
distress, or at a port of refuge or of call, she shall, provided previous 
notice be given to the underwriters, be held covered at a pro rata 
monthly premium, to her port of destination." 

Thus there would seem to be no sufficient reason in the case of 
a single vessel risk why the attachment should take place while 
the vessel is at sea. In the case of fleet insurance a different 
condition exists. In this case the insurance usually attaches 
at the same date on all the vessels of a fleet, and naturally some of 
the vessels will be at sea while others are in port. Custom has 
established the practice of disregarding the position of the vessels 
of a fleet at the time of attachment. The question concerning 
which of two policies should respond for the loss of a vessel, which 
sailed before the date of attachment of the second policy but 
was never heard of again, would have to be determined by the 
circmnstances in each particular case. 

Attachment of Voyage Risks on Hull. — In the matter of voyage 
insurance on hulls, the time of attachment is determined by the 
wording of the policy. If the contract reads "from a port" 
the risk will attach from the moment the vessel sails or breaks 
ground as it is technically called, with the intention of proceeding 
on the insured voyage. If the insurance is written "at and from 
a port," the time of attachment is more difficult to determine. 
It would seem to be the fair meaning of the words, and there are 
decisions which support this view, that the risk attaches when 
the vessel is at the port and is either in readiness to take cargo 
for the proposed voyage, or the captain or the vessel's agents have 
made some preparation looking to the prosecution of the voyage. 
The mere fact that a vessel is in port with no definite employment 
or with no preparation being made to fit her for proposed em- 
ployment, will not cause a policy reading "at and from" to 
attach. The safest practice is to consider that under a voyage 
hull policy reading "at and from" the insurance attaches only 
when the vessel goes on the berth to load. In order that there 
may be no lapse between voyage policies a clause reading, "this 
policy not to attach until expiry of previous policies" may be 
inserted in the contract. It is customary for a voyage policy 
on hull to terminate twenty-four hours after arrival in good 



THE' POLICY. THE TERMINI 135 

safety at the port of destination or as the Lloyd's form of policy 
reads, "until she hath moored at anchor twenty-four hours in 
good safety. " The intent of either clause is that the risk shall 
continue not only for twenty-four hours after mere arrival, but 
a fuU twenty-four hour period after arrival at the customary 
anchorage or harbor in the particular port, where the vessel is 
not exposed to the perils of the voyage. 

Policy May Terminate by Breach of Contract. — While the 
terminus ad quern is dependent on the wording of the poUcy, the 
assured may terminate the insurance short of its ultimate time 
or place of expiration by the breach of any of the expressed or 
implied terms of the contract. The discussion of expressed 
and impUed warranties is reserved for a later chapter but refer- 
ence to these warranties is necessary at this juncture, because 
the breach of one of them will vitiate the insurance and thus 
introduce a new terminus ad quern. So the abandonment by 
the assured of the insured voyage, or the substitution of another 
voyage will terminate the insurance. 

The Doctrine of "No Deviation." — ^The second sentence of 
the paragraph of the printed form referring to the inception 
and duration of the risk reads, "and it shall and may be lawful 
for the said vessel, in her voyage, to proceed and sail to, touch and 
stay at, any ports or places, if thereunto obliged by stress of 
weather, or other imavoidable accident, without prejudice to 
this insurance. " No mention has yet been made of the "doctrine 
of no deviation, " that is, the impUed condition that there shall 
be no departure from, or variation of the insured voyage after 
the risk has attached. Any inexcusable violation of this implied 
condition will temporarily or permanently terminate the insur- 
ance. This being so, the words quoted from the printed form are 
introduced in order to excuse certain forms of deviation so that 
the insurance may not be suspended or automatically terminated. 
The exception to the rule of deviation is of coiu'se made as a 
practical matter, and as an inducement to the captain of a 
vessel to exercise supreme care in order to effect the safety of the 
venture. Were such deviation to make void an insurance, the 
captain might delay making for a port of refuge, in the event of 
threatening weather, thereby unnecessarily exposing the venture 
to loss or damage. However, the facts in a given case must show 



136 MARINE INSURANCE 

the necessity for the deviation, otherwise this clause could 
be used as a cloak for unlawf ' acts. 

The Conduct of the Voyage. — The impUed conditions with 
respect to deviation require that the voyage be commenced within 
a reasonable time, that it be pursued over the usual and direct 
route between the termini and that the vessel be discharged with 
customary dispatch. If it is a well-established usage of a par- 
ticular voyage that certain places be used as ports of call, the 
use of such ports will not be considered a deviation. If the policy 
provides that the destination shall be ports in a given locaUty 
they must be visited in their geographical order, unless there be 
well-estabUshed usage to the contrary. If on the other hand the 
ports of destination are specifically enumerated in the policy, 
they must be visited in the order named. 

When Does Deviation Occur? — ^Deviation may occur at any 
time after the inception of the risk and voids or suspends the 
insurance from the moment the deviation commences. As a 
general principle any deviation voids the insurance. Never- 
theless a deviation may be held to only suspend the insurance 
where the deviation is of such short duration or so temporary as 
to be negUgible, as a delay of an hour or a deviation of a mile. 
The underwriters would, however, be discharged from liability 
for any loss happening during such temporary deviation.* The 
mere intention to deviate does not void the policy; there must be 
an overt act putting the intention into operation. Deviation is 
excusable not only in the cases enumerated in the printed form, 
but also when the vessel leaves her course in order to save life. 
It has been held that deviation to save property alone is not 
excusable, but hull policies ordinarily do permit such deviation 
The extent of the deviation or the fact that it does not materially 
enhance the risk is of no moment in deciding whether or not a 
breach has been committed. The mere fact that a different 
voyage has been substituted after the commencement of the risk 
is sufficient. In order to avoid the hardships which the doctrine 
of deviation imposes on innocent cargo owners, who have no voice 
in the conduct or management of the vessel, it is customary to 
insert in cargo policies, the ''deviation clause" which holds the 
assured covered in the event of deviation or change of voyage, 

1 See Phillips, Section 989. 



• THE POLICY. THE TERMINI 137 

the assured agreeing to notify the underwriter as soon as knowl- 
edge of the deviation is brought to his attention and to pay such 
additional premium as may be required. It should be observed, 
however, that this clause ordinarily does not extend protection 
in the event of the substitution of a different vessel. As deviation 
in the case of time hull insurance would automatically void the 
pohcy for the remainder of the poUcy term, a deviation clause 
similar to that in cargo policies is inserted or it is provided that 
in the event of deviation the underwriters shall not be liable for 
loss occurring while the vessel is out of the policy limits. 

The Valuation. — ^The final sentence in the paragraph under 
consideration reads, "The said goods and merchandises hereby 

insured, are valued (premium included) at ■ — ." In 

general policies may be divided into two classes, namely, valued 
and unvalued. Valued policies represent approximately ninety- 
nine percent of all those written, unvalued policies being rather 
rare except in the case of carriers UabiUty policies to which 
reference has been made. The purpose of the valuation clause 
is to predetermine the worth of the property insured, so that in 
the event of loss this will not be an open question. Herein is 
seen one of the principal differences between marine insurance 
and other forms of indemnity contracts. In fire insurance as a 
rule policies are not valued, but the poUcy is written for a definite 
amount, with the valuation of the subject matter left open and 
subject to determination after loss has occurred. Also in life or 
accident insurance the human life is not valued, although in 
accident insurance we may find that the amount of insurance 
furnished on weekly earnings may be limited to the earning power 
of the man. In marine insurance on the other hand, from the 
earUest times, it has been customary for the underwriter and 
assured mutually to agree on the value of the insured subject. 
Having decided on this value or basis of valuation neither party 
to the contract can raise objection after loss on the ground that 
the value is too low or too high, unless it should appear that a 
fraudulent valuation has been imposed on either party. 

Determination of Value. — ^As already pointed out marine 
insurance endeavors so far as is humanly possible to give perfect 
indemnity to the assured. The assured ships goods to a distant 
port with the reasonable expectation that they will realize a 



138 MARINE INSURANCE 

certain price, perhaps greatly in excess of their cost to him. 
To place the goods in this particular market will necessitate 
the incurring of various expenses, such as freight, insurance 
premium, packing, cartage, customs charges and agents commis- 
sions, so that the value will be a constantly changing one and 
were it not possible to predetermine a value many intricate 
questions would arise as to the real value at the time of loss, 
which might occur at any point on the proposed passage. It 
is far simpler, and in practice works a fair measure of justice, 
to fix a reasonable value and adhere to that. 

Valued Policies in Marine Insurance Justified. — Perhaps in 
fire and other branches of insiu-ance, the chief objection to valued 
policies afises out of the question of moral hazard. A man is in 
possession and control of his fixed property, and the possibiUty 
of obtaining insurance at a determined valuation, might induce 
him to accomplish the destruction of his property in order to 
obtain this fixed value from his underwriters. Human nature 
being what it is, the practice of having open values on fixed 
property is manifestly sound. On the other hand, valued policies 
in marine insurance are justified by the fact that the subject 
matter is moveable property, and in the case of merchandise 
at least is out of the custody and control of the assured. While 
the moral hazard is still present, the assured cannot compass the 
destruction of his property, without collusionon the part of those 
in custody of the property, in the case of hull insm-ance in a 
time of commercial stagnation, when there are more ships 
than there is emplo3nnent for them, the valued policy, especially 
the high valued policy is a real menace to underwriters. The 
insured subject in such cases is under the control of the assured 
and an unscrupulous owner may be tempted to destroy an un- 
profitable vessel in order to obtain the insurance money. 

The Basis of Valuation. — In a single risk poUcy the valuation 
may be expressed as "valued at sum insured," or "valued at 

$ ." In floating policies, however, it is only possible 

to have a basis of value, such as "valued at invoice cost plus 
ten percent plus prepaid or guaranteed freight," or in the case of 

imported goods "valued at $ the £ sterUng or the franc 

of invoice;" or a fixed value per unit of measure may be agreed 
upon. Under this form of poUcy it happens many times that the 



THE POLICY. THE TERMINI 139 

individual shipments applicable to the floating policy are not 
known until after the risk has terminated by arrival or by the 
loss of the vessel. In either case were the basis of valuation 
not determined endless disputes would arise as to the amount of 
loss suffered by the assured, or as to the amount of 
premium to which the underwriter is entitled, since the premium 
is charged at predetermined rates appUed to the insured amounts. 
Hull Values. — In the case of hull insurance, the valuation is 
always expressed in doUars. Owing to the large values involved 
in the modern cargo or passenger steamer, it is usual to divide 
the valuation into parts, one appljdng to the hull, tackle and 
furniture of the steamer, the other to its machinery. In the 
case of expensively fitted passenger steamers or of refrigerated 
vessels, a fm*ther separation may be made showing the value 
of the cabin outfit or the refrigerating plant. No problem 
is more difficult than that of determining a fair insured value for a 
vessel nor is any problem more important from the viewpoint 
of sound and conservative underwriting. The purpose in sepa- 
rating the value of a steamer into parts is to perniit of claims 
for smaller losses being made, the percentage of loss necessary 
to make a claim being appUed to each separate valuation or 
to the whole value, whichever method is most advantageous to 
the assured. 



CHAPTER 8 
THE POLICY {Continued). THE "PERttS" CLAUSE 

Perils Insured Against. — ^The quaintest portion of the marine 
insurance policy and that part of it which most clearly shows 
that it is a document that originated many years ago, is the 
paragraph dealing with the perils insured. These hazards 
are not listed in any logical order, marine perils and war perils 
following each other indiscriminately, indicating that this portion 
of the policy at least was the result of evolution, new perils being 
added as commerce developed and as new diflSculties were 
encountered by mariners in extending the scope of their com- 
mercial activities. Words are used which have become obsolete 
and leave in doubt the precise form of peril which the early 
underwriter and merchant had in mind. General words follow 
the specific enumeration of hazards making obscure the true 
intent of the poUcy. Read without reference to the wealth 
of legal lore referring to this particular part of the policy, the 
document is vague, misleading and perhaps unintelligible. 
But practically every word in the paragraph has been weighed 
in the judicial balance and its own meaning and its meaning 
in relation to the context has been determined. Therefore 
this particular wording has continued through the centuries, 
with some slight modifications appearing in the various forms 
of the individual companies, but in general the same wording 
being followed in all. No company cares to adopt an entirely 
new wording, lest the established practices and decisions of the 
preceding centuries be overthrown and a new contract, subject 
to all the dangers of new legal interpretations, be found to leave 
the meaning of the poUcy in doubt. . 

A Formidable List of Calamities. — The enumeration of the 
perils in the printed form under consideration is worded in the 
following manner, i.e., 

140 



THE POLICY. THE ''PERILS'' CLAUSE 141 

'^ Touching the adventures and perils which the said 

Insurance Company is contented to bear, and takes upon itself in this 
voyage, they are of the seas, men-of-war, fires, enemies, pirates, rovers, 
thieves, jettisons, letters of mart and countermart, reprisals, takings at 
sea, arrests, restraints and detainments of all kings, princes, or people, 
of what nation, condition or quality soever, barratry of the master 
and mariners, and all other perils, losses and misfortunes that have or 
shall come to the hurt, detriment or damage of the said goods and 
merchandises, or any part thereof." 

Truly this is a forniidable list of calamities and seems to afford 
but little hope of escape for the underwriter. The courts, how- 
ever, have been reasonably kind to the underwriters in their 
interpretation of these perils and have in most cases tempered 
justice with mercy. 

Doctrine of Ftoidmate Cause. — It will be noted that the 
policy applies only on the voyage insured and covers only losses 
occasioned by the perils stipulated, provided these hazards 
or any one of them is the proximate cause of the loss. The 
doctrine of proximate cause is in no way peculiar to the subject 
of marine insurance, since it is a familiar principle of all law 
concerning the liability of one person to another for injury 
suffered. This principle of fixing liability by considering the 
direct, primary and immediate cause of the injury suffered 
and not the remote and indirect cause, is of the greatest 
importance in determining liability under marine insurance 
policies. Phillips in Section 1132 of his admirable work on the 
law of marine insurance sets forth the determination of the 
proximate cause in these words: 

" In case of the concurrence of different causes, to one of which it is 
necessary to attribute the loss, it is to be attributed to the efficient 
predominating peril, whether it is or is not in activity at the consumma- 
tion of the disaster." 

That is, if at the time of disaster there are in operation two 

perils, one of which is covered under the policy and the other 

is not, as in the case of a marine peril operating at the same time 

as a war peril, it must be determined which of the two perils 

is the all efiScient and predominating one which caused the 
11 



k. 



142 MARINE INSURANCE 

resultant loss. The fact that the hazard which was the proximate 
cause was not in activity at the moment of destruction would 
not preclude that peril from being the actual and efficient cause 
of disaster. To illustrate, a steamer insured under a policy 
covering marine risks only, might be torpedoed, but nevertheless 
still float and have a reasonable chance of making port. Because 
she is partially out of control of the master, however, on account 
of making water and having a heavy Kst, in endeavoring to 
make port the steamer might miss the channel, run ashore 
and become a total loss. The immediate cause of the total 
destruction of the vessel would undoubtedly be the stranding, 
a marine peril, but the proxijnate cause would be the torpedo- 
ing, a war peril, and the loss should not fall on the marine 
underwriter. 

Losses Which are not Covered by the Policy. — ^It must be borne 
in mind that while an underwriter is liable for losses caused 
by perils of the sea, the meaning of which will be explained 
presently, he is not necessarily Uable for perils on the sea. The 
underwriter is not Uable for the ordinary and inevitable action 
of the forces of nature causing ordinary wear and tear to the 
vessel. He is not liable for the natural decay of the vessel 
due to the passage of time. He is not liable for loss arising 
from the subject itself because of its inherent qualities, nor is he 
Uable for a fire arising from the improper" preparation of a raw 
commodity, as for instance the occurrence of spontaneous com- 
bustion in a cargo of hemp which was shipped in an improperly 
cured condition. But it seems he may not deny liabiUty for 
consequent damage to property insured by him belongmg to 
another which is part of the same ventiu'e. Neither is the under- 
writer responsible for loss caused by the ordinary leakage of 
liquids. He is Uable, however, for events which, through no 
fault of the assured, enhance the risk, as for instance unavoidable 
delay in the commencement or prosecution of the voyage, 
by which the time at risk under the poUcy is increased beyond 
that in contemplation by the underwriter at the time of accepting 
the risk. Therefore, if a poUcy in time of peace covers the risks 
of war at a determined rate for a named period, and war sud- 
denly breaks out, the underwriter is not reUeved of his respon- 
sibility, notwithstanding the fact that the compensation that he 



THE POLICY. THE '* PERILS" CLAUSE 143 

is receiving, through the occurrence of an xmforeseen event; is 
inadequate. 

Losses Due to Fraud or Misconduct. — ^An underwriter, 
obviously, is not responsible for losses caused by perils insured 
against, which are directly incurred by fraud or misconduct, 
but it must be shown that such fraud or misconduct is the 
proximate cause of such loss. NegUgence in order to void the 
policy must amount to gross negligence or to willful misconduct. 
Errors of judgment on the part of the captain of a vessel will not 
forfeit the insurance, but wiUful misconduct done in bad vfaith 
and illegally, or gross carelessness of the captain, showing culpa- 
bility, will not be covered by the poUcy unless barratry, which 
term will later be explained, also is covered. In connection with 
the preceding remarks it should be noted that Congress in 1893, 
in order to promote the overseas commerce of the United States, 
passed what is known as the "HarterAct" (see Appendix, 
p. 417). This statute relieves the owner of a ship from the conse- 
quences of careless or negUgent acts on the part of the master of 
the vessel, or from liability for losses caused by inherent defects 
or weakness in the vessel itself, provided the owner or his man- 
ager has taken all precautions to provide a seaworthy vessel, 
which has been adequately equipped and manned by a competent 
master and crew. Similar statutes are found in the laws of other 
maritime nations. 

Perils of the Sea. — In the enumeration of the hazards against 
which protection is afforded by the poUcy, perils of the sea are 
first mentioned. These are the general words used to describe' 
all losses which are the result of the unusual action of the forces 
of nature operating in and about navigable waters. A careful 
distinction must be made, however, between "perils of the seas" 
and "perils on the seas." The poUcy does not, under the form 
of wording used, cover all perils which may overtake the venture 
on the seas, but only those which are the direct result of ac£ual 
perils of the sea. Included in these general words are losses 
resulting from the unusual action of the wind, not the ordinary 
wear and tear caused by the ever-moving atmosphere, but losses 
resulting from the tempestuous action of this force. It is not 
necessary that the resultant loss be an immediate eflfect of wind 
as the loss of sails or the snapping of a mast. It may be a con- 



^ 



144 MARINE INSURANCE 

sequential loss occasioned by the wind, as the leaking of the seams 
of a vessel, through unusual strain on sails and masts by excessive 
wind pressure. 

Enumeration of Perils of the Sea. — The tempestuous action 
of the waves causing a vessel to be buffeted and battered by the 
force of the water is a peril of the sea, as are also the risks of 
stranding on reefs, rocks and shoals. Loss caused by the action 
of Ughtning is also a peril of the sea, lightning being distinguished 
from fire, in that loss may be occasioned by the action of lightning 
without any fire resulting. Collision is also one of the perils of 
the sea, occasioned as it often is, through the presence of fog or 
darkness or ice or other natural condition interfering with the 
navigation of the vessel. Collision may involve the coming 
together of vessel with vessel or the collision may be of one 
vessel with an iceberg or with some other floating or stationary 
object. The use of the word " collision "*as a peril of the sea 
should not be confused with the protection provided under 
marine policies on hulls, wherein the underwriter assumes 
responsibility for the liabUity imposed upon the owner of a 
vessel for loss caused to innocent third parties by the negligent 
collision of his vessel with another. 

Unavoidable Accident a Peril of the Sea. — '^ Perils of the sea" 
will also cover unavoidable accident, the result of the physical 
topography of the ocean shores and the ocean bed. For instance 
a vessel in a properly equipped tidal harbor may take the bottom 
in a place where through action of the tide or through some other 
Unavoidable cause the bottom is uneven, causing the vessel to 
tip with resultant damage to the hull or cargo. Derangement of 
or damage to the machinery of a steamer or mechanically pro- 
pelled vessel through stress of weather or other fortuitous cause 
is also covered under the general words "perils of the sea." 

Other Perils of the Sea. — The policy covers seawater damage 
due' to an insured peril and it has been held that injury caused by 
rats on board ship is also a peril of the sea provided the owner and 
captain have exercised reasonable care to rid the vessel of this 
pest. It would seem, however, that damage by rats is rather a 
peril on the sea, than a peril of the sea, and that underwriters 
should not be held Uable for losses of this nature unless specially 
insured against. In fact, it is so ruled in paragraph 55, Section 



THE POLICY. THE "PERILS'' CLAUSE 145 

(C) of the Marine Insurance Act of Great Britain. Sinking, of 
course, is comprehended in the term "perils of the sea" this being 
the inevitable result of most of the "perils of the sea'' if their 
action is not controlled and checked. 

Fire. — It will be more logical to ignore the sequence of the 
hazards as they appear in the prmted form and consider first 
the perils which are marine in their nature and then treat of 
those which are the result of the acts of individuals or of nations. 
Fire is specifically mentioned as this is not a peril of the sea but 
a peril on the sea. The underwriter is liable not only for the ac- 
tual cargo or the particular part of the vessel destroyed by fire, 
but is also liable for consequential losses resulting from the fire. 
Thus the underwriter assumes responsibility for damage caused 
by water or steam used in the hold of a vessel in an endeavor to 
smother the fire, or by the action of smoke damaging cargo not 
touched by the fire, or penetrating other holds not involved in 
the fire (see General Average, p. 307). The underwriter is also 
liable for the action of chemicals or gases used in an endeavor to 
smother the fire, as in the case of some of the patent fire extin- 
guishing apparatus with which vessels are equipped. 

Fire Protection. — Fire is one of the greatest and most feared 
dangers which mariners face. A great deal has been done by 
the installation of fire-fighting devices and fire detectors to pre- 
vent and control fires at sea, but much remains still to be done. 
Perhaps no problem connected with marine perils offers a more 
fertile field for the inventor than does this. Fire control on sea 
is materially different from that on land and yet in some respects 
is essentially the same. Steam injectors take the place of 
stand pipes in buildings. Fireproof and watertight bulkheads 
correspond to the fire walls in land structures, while sprinkler 
systems so common in buildings have been installed in but 
few steamers. When the depth of a steamer's hold is considered, 
the futility of the ordinary form of sprinkler will be seen. A fire 
starting at the bottom would probably attain such headway, 
before the sprinkler would work, that it would be useless even if 
it were possible for the water to reach the seat of the fire. Above 
the lower deck of a vessel where the height of the cargo space is 
not great sprinklers are very effective, if enough heads are pro- 
vided, but the problem of a water supply by gravity feed is not 



146 MARINE INSURANCE 

SO easy as on land. A dry system may, however, be used. It 
must be remembered that when at sea the hatches of a vessel 
are usually closed, so that a fire may smolder and attam a firm 
hold on the cargo some time before it is detected. Up to the 
present, steam introduced into the hold by means of steam pipes 
so installed as to give a good distribution of steam over the entire 
hold, has been found most effective in the control of fires. Other 
devices introducing gases which absorb the oxygen in the hold 
and thus smother the flame are very effective, but their installa- 
tion is expensive and the chemicals used sometimes do a great 
amount of damage to the cargo. While the fire hazard does not 
affect the seaworthiness of the vessel, in the ordinary meaning 
of that term, from the viewpoint of the marine underwriter the 
design and equipment and loading of a vessel with respect to the 
fire hazard has a material bearing on the seaworthiness, of the 
vessel as an underwriting proposition. 

Jettison. — Jettison is another peril on the sea, but not of the 
sea, which is specially covered by the policy. Jettison is defined 
by PhilUps (Section 1278) as, 

"the throwing overboard of part of the cargo, or of any article on 
board of a ship, or the cutting away of masts, spars, rigging, sails, or 
other furniture for the purpose of lightening or relieving the ship in case 
of necessity or emergency." 

Jettison must be distinguished from "washing overboard" 
which is a peril of the sea with respect to cargo which is laden 
and specially insured on deck. Jettison is a voluntary act done 
for the purpose of saving the general interest. The early mari- 
ners in their frail craft, found that the best way to save their lives 
and their ships in the event of storm was to throw cargo out of 
the ship to lighten it. Jettison, therefore, was the cause of many 
of the early losses, and proved a great burden to the merchants. 
At a very early period in commercial history, losses by jettison were 
considered as sacrifices made in the common interest and were 
treated as general average losses for which contribution was made 
by all interested parties. With the invention of insurance this 
practice was firmly established, so that underwriters today are 
more interested in the method of contributing for loss by jetti- 
son than in the actual jettison itself. 



THE POLICY. THE ''PERILS'' CLAUSE 147 

Barratry. — ^Jettison being a voluntary, justifiable act of the 
master of the vessel, it will be proper to consider next the peril 
of barratry which is occasioned by the willful misconduct of the 
master or the mariners. Barratry is defined as a fraudulent 
breach of duty or a willful act of known illegality on the part of 
the master of a ship, in his character of master, or of the crew, 
to the injury of the owner of the ship or cargo and without his 
consent. It includes every breach of trust committed with dis- 
honest purpose, as by running away with the ship, sinking or 
deserting her or by embezzling the cargo. At the present time 
with the rapid means of communication existing between the 
ends of the earth, barratry has become a rather unprofitable and 
dangerous occupation. In former times, however, when a ves- 
sel would be unheard of for months at a time, it was not unusual 
for the captain to use the ship for his own purposes. Such un- 
lawful act was barratry and a loss occurring during such misuse 
of the vessel would not be covered unless barratry was included 
among the insured perils. So willful violations of law, such as the 
violation of a blockade or an embargo, or trading with the enemy, 
even though done for the purpose of benefiting the owners are 
barratrous acts. The willful action of the master or the mariners 
in putting the vessel in a position of peril by disobeying the in- 
structions of an authorized pilot or cutting a cable so that the 
vessel would run ashore, or proceeding on a voyage when cap- 
ture by the enemy was certain and other like cases have been 
held to be barratrous acts. In any particular case it is necessary 
to distinguish between willful misconduct and errors of judg- 
ment, although gross ignorance and recklessness on the part of the 
master may amount to barratry. As the master is the agent of 
the owner in the management of the vessel, it is quite usual to 
except the risk of barratry of the master in an insiu*ance on the 
hull. This seems logical as it is rather strange to insure the owner 
of a vessel against the wrongful acts of one who he himself has 
intrusted with the care of the ship. With respect to the mariners 
the case is different in that these men are not directly chosen by 
the owner, but rather by the master. It is quite reasonable, 
however, that the cargo owner who has no voice in the selection 
of the master or crew should have protection against their wrong- 
ful acts. 



148 MARINE INSURANCE 

Lawless Acts and War Perils. — The remaining perils specific- 
ally enumerated refer to the overt acts of persons or peoples who 
are not connected with the venture but who either from personal 
or national motives seek to injure, appropriate or destroy the 
ship and its cargo. These perils naturally group themselves into 
two classes. The first class includes perils which are the result 
of the acts of individuals or groups acting on their own responsi- 
bility and without the sanction of any recognized government. 
These hazards are described as pirates, rovers, and thieves. 
The second class is composed of those perils which are the results 
directly or indirectly of the belligerent acts of hostile govern- 
ments. These latter acts are supposed to be executed in accord- 
ance with the principles of international law and in wars previous 
to 1914 such law was generally observed. In the recent World 
War, however, at least one of the belligerents set up a new stand- 
ard of conduct claiming that might is more powerful than right, 
with the result that marine underwriters had to revise their 
preconceived notions of the hazards which belligerent action 
involved. The peril thieves describes the acts of an individual 
or a band of individuals acting in contravention of the law 
of the place where the criminal act of theft is committed, 
while rovers and pirates describe similar acts committed on 
the high seas under the sanction, it may be, of an unorganized 
and unrecognized government acting in defiance of international 
law. 

Theft and Pilferage. — ^Theft may be first considered. Theft 
as used in the marine insurance poUcy is generally recognized 
by merchants and by the textbook writers as robbery committed 
by force as distinguished from robbery committed by stealth, 
which latter form of larceny is known by the specific term "pil- 
ferage." It was always the intention of underwriters to protect 
property on vessels from losses occasioned by the criminal acts 
of those who obtained access to the property by force. Pilfer- 
age, however, was not in the contemplation of the underwriter 
when property was insured, because such loss was supposed 
to be the result of the criminal acts of those who had a right to 
be with the property, such as stevedores or others who by stealth 
mingled with them and thus had access to the goods. Unfortu- 
nately this theory and practice were overriden in certain state 



THE POLICY. THE *' PERILS'* CLAUSE 149 

courts, where the judges, in an academic discussion of the mean- 
ing of the word thieves, ignored for the most part the practice 
of merchants and underwriters which of old were the basis on 
which marine insurance law was determined, and held that the 
word thieves covered what is commonly known in marine circles 
as pilferage. Accordingly most poUcies in use in the United 
States have inserted the words "assailing thieves" in order to 
make clear the original and present intention of underwriters 
in insuring against theft. It is interesting to note in this connec- 
tion that no such interpretation has been given to the word 
thieves in the English courts and in the Marine Insurance Act, 
paragraph No. 9 of the rules for construction reads, "The term 
"thieves" does not cover clandestine theft or a theft committed 
by any one of the ship's company, whether crew or passengers." 
Such clandestine theft under the term "pilferage" is generally in- 
cluded in marine policies by special stipulation with unfortunate 
results to both assm-ed and underwriter. This undesirable con- 
dition is due to the fact that the ship is not held Uable for this 
petty thieving. It is against public poUcy that the ship be 
reUeved of this Uabihty either by agreement in the bill of lading 
or otherwise, nevertheless no practical method has been devised 
for proving that these losses occur while the property is in the 
custody of the carrier. 

Pirates and Rovers. — ^The two expressions pirates and rovers 
are hard to distinguish, both terms referring to depredations 
committed on the high seaa in violation of the laws of nations and 
of such a character that if committed on the land the crime would 
amount to a felony. Pirates and rovers are the outlaws of the 
high seas and the enemies of society owning allegiance to no 
authorized government. It may be that the word pirates origi- 
nally referred to those who lay in wait on the high seas, hoping to 
entrap their victims; while the word rovers referred to those who 
sailed the high seas seeking their prey. Such inferences are, how- 
ever, conjectural. Gow suggests that the word rovers may have 
been added to include specially the Mohammedan sea robbers 
of North Africa. These two perils have, however, become obsolete 
since the United States cleared the sea of the Barbary pirates in 
the early part of the nineteenth century, though many of the 
acts committed in the World War amounted to piracy, notwith- 



150 MARINE INSURANCE 

standing the fact that they were committed under the authority 
of a so-called "estabUshed" government. 

War Perils. — The remainder of the perils enumerated in the 
poUcy are true war perils and it was the insuring of these risks 
that caused the gigantic development in insurance in England 
in the latter part of the eighteenth and the beginning of the 
nineteenth century. History has repeated itself and again an 
unprecedented expansion in marine insurance resulted from the 
exigencies of the late war and the enhanced risks to which prop- 
erty at sea was exposed. In the enumeration of these war perils 
difficulty is experienced in determining what is the real meaning 
of the words. Some of the words, used to describe perils, have 
become obsolete and others are so alike in meaning as to make 
difficult any differentiation in the perils to which they refer. 

Men-of-war. — ^The first of the war perils known as men-of-war 
is an elastic term general enough in its meaning to include all 
the new devices that new wars produce. "Men-of-war" refers 
to the aggressive acts of a belligerent government committed on 
the seas by means of war machines. In the early days of inter- 
national strife men-of-war was a word which adequately described 
the only marinie offensive weapon. Today, however, the words 
refer not only to battleships, the successors of the former men-of- 
war, but to submarines, airplanes, destroyers, and the equipment 
of these devices in the form of torpedoes, mines and bombs. 
Mines, both stationary or floating, and all other mechanical 
devices used by belligerents to effect the destruction of property 
on the sea are included in the term "men-of-war." 

Enemies. — If there be question whether or not any particular 
offensive device is included under the term men-of-war, the next 
peril, that of enemies is broad enough to include that device. 
Doubt has been expressed as to whether cruisers are men-of-war, 
but if they are not they certainly are enemies and can find refuge 
under that term. The peril of enemies would seem to be em- 
braced by the peril of men-of-war, but it may be that the word 
enemies was introduced into the marine poUcy to protect the 
assured against losses occasioned by the acts of privateers and 
other openly declared foes imder a belUgerent flag, who are 
authorized to carry on warfare but who do not belong to the 
government whose flag they fly. 



THE POLICY. THE ** PERILS" CLAUSE 151 

Letters of Mart and Countermart. — While privateering was 
formally abolished by civiUzed nations by the Treaty of Paris 
in 1856, the references to this mode of warfare still remain in the 
policy. Letters of mart and coimtermart refer to privateers. 
These letters were granted by belligerents to their citizens who 
had suffered loss at the hands of the enemy in order that they 
might recoup their losses. Letters of mart refer to the com- 
missions granted by one of the beUigerents to its citizens, while 
letters of coimtermart describe the commissions granted by the 
opposing belligerent to its citizens as a retaUatory measure. 
These letters granted a Umited commission to the privateer, 
who should be distinguished from the pirate, as the former sails 
under a national flag, is under governmental commission and 
operates only against the declared enemies of his own nation. 
The practice of issuing these letters is now condemned, hence 
these terms are relatively unimportant to the student of marine 
insurance. 

Reprisals. — It is difficult to distinguish .reprisals, the next war 
peril emmierated, from letters of mart and coimtermart, but the 
word may have been inserted in the policy to cover losses occa- 
sioned by acts done in retaUation for wrongs against one nation 
or its subjects committed by another nation or its subjects, short 
of actual war. The word has been in common use in the recent war 
with reference to acts of retaUation against crimes committed by 
one of the belligerents in violation of international law. Whether 
or not a similar meaning is intended in the insurance poUcy 
is a matter of conjecture. It is interesting to note that in the 
Lloyd's form of pohcy the word "reprisals" does not appear, 
but in its place is found the word "surprisals," which would seem 
to be synonymous with "takings at sea," which is the next peril 
enumerated in the American form. 

Takings at Sea. Arrests. — This expression is equivalent to 
the modern word "capture" and refers to the forceful taking of 
a vessel or its cargo with the intention of retaining possession 
thereof. In the recent war "capture" was the principal peril 
to which property of the Teutonic Allies or their sjrmpathizers 
was subject, while men-of-war describes the principal peril to 
which the property of the rest of the world has been exposed. 
The word arrests, while similar in meaning to "takings at sea" 



162 MARINE INSURANCE 

has reference more particularly to the capture of a ship or cargo 
for the piu'pose of making an examination and thed after adjudi- 
cation, retaining or releasing the property. 

Restraints and Detainments. — Restraints refer to the action 
of a government in estabUshing an embargo or other restrictive 
measure, thus preventing the free use of its ports by commercial 
vessels, causing the interruption and possible loss of voyages 
involving such ports and perhaps consequent sacrifice of cargo. 
Detainments on the other hand refer to losses resulting from the 
detention of a vessel and its cargo by blockade or possibly by a 
quarantine regulation or some other interference by the police 
power of a nation while a vessel is in port. In this connection, 
however, the use of the word detainment does not extend to 
losses which are the result merely of delay or interruption of the 
voyage, and cause, for example, injury through loss of market or 
some other remote cause. 

Kings, Princes or People. — The modifying words *'of all 
kings, princes or people of what nation, condition or quality 
soever" are introduced to show that the perils intended to be 
covered are not the mere acts of individuals, but the acts of 
groups of individuals organized into governments, whether such 
governments be duly constituted or not. The rules of construc- 
tion of The Marine Insurance Act of Great Britain, paragraph 10, 
state that this phrase refers to political and executive acts, and 
does not include a loss caused by riot or ordinary judicial process. 

All Other Perils. — The closing words of the "perils clause" 
reading "and all other perils, losses and misfortunes, that have 
or shall come to the hurt, detriment or damage of the said goods 
and merchandises, or any part thereof" if imexplained is exceed- 
ingly misleading. If the words mean what they state the 
enmneration of specific perils would seem to be needless,* but the 
very fact that specific perils have been enumerated gives the key 
that unlocks the meaning of these words. It has been decided 
more than once that there must be read into this clause after 
the words "and all other perils, '' the words "of the same nature." 
It is only fortuitous perils happening while the property is under 
the protection of the poUcy that are covered by these general 
words and not every conceivable injury that may come to the 
hurt, detriment or damage of the property. Had such construe- 



THE POLICY. THE "PERILS** CLAUSE 153 

tion not been given to this clause underwriters would have had 
either to revise the basic wording of their poUcy or burden the 
document with exceptions. 

The "Free of Capture" Clause. — While the policy covers war 
perils, it is customary, in view of the hazards to which property is 
suddenly subjected by the declaration of war, to incorporate into 
marine pohcies a clause known as the war clause or the "free of 
capture and seizure" clause by which the underwriter is reUeved of 
all purely war perils. Various forms are used to accomplish this 
end, but they are all alike in their purpose. By the deletion 
of this clause the policy is immediately restored to its original 
condition, but the imderwriter is then in the position of being able 
to charge adequate rates of premium for the increased hazard 
assumed. Underwriters in their eagerness for business, have 
sometimes offered as an inducement in times of peace, a poUcy 
covering the risks of war without special charge or with merely 
nominal addition for the war hazard; only to find themselves, in 
the event of sudden war, committed to these hazards without 
the opportunity of chargmg adequate premium for the increased 
risk placed upon them. 

Strikers and Locked Out Workmen Clause. — Owing to the 
fact that marine insurance on cargo is usually extended to cover 
from warehouse to warehouse or otherwise insures the goods on 
shore prior to shipment and after discharge, the danger of under- 
writers being held liable for losses, resulting from the unlawful 
acts of strikers or due to riots or civil commotions, is materially 
enhanced. In such cases the loss is usually due to fire but it is 
often difficult to prove whether the proximate cause of the fire 
was a natural cause or was the result of an unlawful act. Under- 
writers are unwilling to assume liability for losses due to such 
unlawful acts unless opportunity is afforded for the special con- 
sideration of these risks. Accordingly most cargo policies con- 
tain a clause similar in import to the following, viz: 

" Warranted free of loss or damage caused by strikers, locked-out 
workmen or persons taking part in labor disturbances or riots or civil 
commotions." 

As in the case of the "Free of Capture and Seizure Clause," 
imderwriters will as a rule waive the "strikers and locked-out 



154 MARINE INSURANCE 

workmen" clause in consideration of the pa3nnent of additional 
premium. The clause recommended by the American Institute 
for this purpose reads: 

"In consideration of an additional premium of percent (such 

premium being subject to revision from day to day) it is agreed that 
this policy shall also cover destruction of the property insured or 
damage done to it by strikers, locked-out workmen, or persons taking 
part in labor disturbances or riots or civil commotions, but warranted 
free of claim for loss, damage or expense arising from deterioration, 
loss of market or delay, or from extra handling or storage." 

Modifying Clauses. — Much of an underwriter's time is con- 
sumed in preparing and inserting in poUcies clauses restricting 
or enlarging the protection afforded by the basic form of policy, 
but the contract as originally worded has stood the test of time 
and offers a full measure of protection against the perils to which 
property in transit over water routes is exposed. 



CHAPTER 9 

THE POLICY (Concluded). SUE AND LABOR CLAUSE 

Sue and Labor Clause. — ^The "Sue and Labor" clause imme- 
diately follows the enumeration of the insured perils, and is 
found in all Marine Insurance contracts. When the words were 
first inserted in policies is not known, but a clause appears in the 
"Tiger" policy dated 1613 which is of similar import. The 
latter part of the clause, the "waiver," is however of later 
origin and may have been introduced in part at least to make clear 
the privilege of the imderwriter himself to step in and protect the 
insured property. The "Sue and Labor" clause reads: 

''And in case of any loss or misfortune, it shall be lawful and necessary 

to and for the assured, factors, servants and assigns, to sue, 

labor and travel for, in and about the defense, safeguard and recovery 
of the said goods and merchandises, or any part thereof, without preju- 
dice to this insurance; nor shall the acts of the insured or insurers, in 
recoveriag, saving and preserving this property insured, in case of 
disaster, be considered a waiver or an acceptance of an abandonment; 
to the charges whereof, the said Insurance Company will contribute 
according to the rate and quantity of the sum herein insured . . . ." 

Purpose of Sue and Labor Clause. — In the early days of 
overseas commerce voyages were of long duration and the means 
of conunimication between the various ports of the known world 
were slow and unrehable, so that it became necessary for the 
assured and his imderwriter to agree that in the event of mis- 
fortune overtaking the venture, it should be the duty of the 
assured, who in the early days either accompanied the ship 
or the cargo himself, or sent as his representative an agent 
known as the supercargo — ^to use every means within his power 
to protect the property and save it from further damage after loss 
had occiurred. He was authorized to incur expenses for this 
purpose and the measure of his duty was the care a prudent 
iminsured owner would exercise in regard to his property. The 

155 



156 MARINE INSURANCE 

assured and the underwriter also agree in this clause that their 
legal position with respect to loss recoverable under the policy 
will in no way be affected by any acts which either may perform 
toward the safeguard and recovery of the imperilled goods or 
ship. It will be observed that this clause becomes operative 
only after loss or misfortune has occurred and is not merely a 
statement of the duty with which the law would naturally charge 
an assured, but is an affirmative agreement that it shall be neces- 
sary for the assured to perform the duty of saving and preserving 
the property. 

Applies to Specific Property Insured. — The ''Sue and Labor'' 
clause is strictly limited in its application to the specific property 
or interest to which the poUcy relates and to the expenses incurred 
solely in relation to such property or interest. Efforts may be 
put forth and expenses incurred which in a measure benefit the 
insured interest, but are not of exclusive value to this interest, 
since in their nature they are common benefits and thus more in 
the nature of general average charges. Such efforts and expendi- 
tures do not come within the meaning of the sue and labor clause 
and the underwriter assumes no direct responsibility for them. 

Assured Must Enforce His Rights Against Third Parties. — The 
original purpose of the "Sue and Labor'' clause has become more 
or less obsolete owing to the present rapid means of communica- 
tion between different parts of the world because of the submar- 
ine cable and the wireless telegraph, it now being customary for 
the underwriter to give specific instructions as to salvage meas- 
ures to be undertaken and as to expenses to be incurred. Never- 
theless the clause is of vital importance at the present time. 
Many losses which overtake property, especially cargo, are due 
to the negligence or breach of duty on the part of some third 
party. The enforcement of claims against such negligent per- 
sons and the collection of damages for the injured property are in 
many cases troublesome, and the assured is incUned to ignore 
his legal remedies and to fall back on the protection of his insur- 
ance poUcies. The underwriter has no direct recourse against 
these third parties, but by invoking the requirements of the "Sue 
and Labor" clause, he is enabled to hold the assured to his duty 
of taking the necessary measures to protect and enforce his legal 
rights with respect to the damaged property. 



THE POLICY, SUE AND LABOR CLAUSE 157 

The Premium. — ^The Sue and Labor clause is followed by the 
words, ''having been paid the consideration for this insiu-ance 

by the assured or assigns, at and after the rate of 

" The premium furnishes the vaUd considera^ 

tion without which the poUcy would not be an enforceable con- 
tract, but the wording as given in the poUcy form must not be 
construed as a confession on the part of the underwriter that the 
premium has been paid by the assured. It is rather a condition 
upon the fulfillment of which the underwriter will carry out the 
agreements to which he has obUgated himself. It is interesting 
to observe in this connection that the Lloyd's form of poUcy 
reads: "Confessing ourselves paid the consideration due unto 

us for this assiu'ance by the assured, at and after the rate of *' 

Even this has been held to be only prima fade evidence of 
payment and the question whether or not the payment has 
actually been made can be opened up in a court of law and the 
facts determined. 

Competition Affects Rates. — No part of tHe policy is of more 
interest to the underwriter than is the rate of premium. Upon 
the proper determination of this rate depends his success or fail- 
ure. Rates too high drive business to others, rates too low invite 
failiu^e. The question of premium is much more vital to the 
underwriter than it is to the assured, for the latter should be 
interested primarily in the security of the insurance company 
and secondarily in the rate of the premium. It is axiomatic in 
insurance that the best is in the long run the cheapest. Rates 
are, as abeady indicated, based on the law of averages and tested 
by the experience of a period of years. The law of supply and 
demand, or in other words the presence or absence of competi- 
tion, as in other Unes of commercial activity has an important 
bearing on the cost of insiu-ance. 

Premitun Charged on Amount Insured. — The amount of 
premium appears in the margin of the policy and is determined 
by multipljdng the sum insured by the rate of premium. The 
rate of premium is expressed ordinarily as so much percent, that 
is, one percent indicates that the cost of the insurance is one 
dollar for each one hundred dollars insured, one half percent 
indicates that fifty cents is the cost of each one hundred dollars 
of insurance. The amount insiu'ed in a special policy is deter- 

12 



158 MARINE INSURANCE 

mined by agreement at the time the risk is insured. Under an 
open policy this amount is calculated by applying the basis of 
valuation to the invoice or quantity insured, depending upon 
whether the invoice, or a imit of measure as the pound, ton, 
or barrel is specified by the floating contract as the basic measure 
of value. Of course, under a floating poUcy the amount insured 
on any one risk cannot, in the absence of special agreement, ex- 
ceed the limit of Kability expressed in the contract. 

Rates of Premium Used in Great Britain. — It is interesting 
to observe in this connection that the method of quoting rates in 
Great Britain, while similar to the American system in principle, 
is different in expression. In Great Britain one hundred pounds 
sterUng is the basic unit of insurance, so that we find rates ex- 
pressed as one pound percent, two pounds percent, etc., indi- 
cating that the cost of insurance per hundred pounds sterling 
is respectively one pound and two pounds. When the rate is 
less than one pound percent, a different set of symbols is used. 
As there are twenty shillings in a pound sterling and twelve 
pence in the shilling, small rates are expressed as so many shillings 
or pence percent. For instance a rate of one-twentieth of one 
percent in an American policy would be expressed in the English 
form as one shilling percent, while a rate of one-sixteenth per- 
cent or six and one-fourth cents per hundred dollars, would appear 
in the English poUcy as one shilling three pence percent or J^ 
percent as it is usually written. This method of rating is very 
confusing at first, but if the relative values of the pound sterling, 
shilling and pence are kept in mind, and the fact that the imit 
of insurance is one hundred pounds sterling this confusion of 
thought will soon disappear and the English rates will be as 
readily understood as are the American. 

Return Premium. — Closely associated with the subject of 
premium is the question of return premiiun. It has been held 
that there can be no return premium after a risk has once at- 
tached, unless it can be shown that the risk insured is divisible 
and that the rate as quoted is also divisible — ^that is, that a 
definite part of the rate quoted is to apply to each portion of the 
risk insured. The reason for permitting an underwriter to 
retain full premiiun after the risk has once attached, even though 
only a portion of the voyage is accomplished may be best ex- 



THE POLICY, SUE AND LABOR CLAUSE 159 

plained by considering the case of an annual hull insurance. It 
has been held by the courts that the rate charged for such insur- 
ance is an annual rate, not based on so much rate for each day's 
risk or each month's risk, but an indivisible charge adequate 
for the year's risk. The coiu-ts, therefore, have held that as 
they cannot determine justly what portion of the rate should 
apply to the part of the risk actually incurred in case the vessel 
is destroyed during the insured period, the underwriter is entitled 
to retain the whole premium. That this reasoning is sound will 
be apparent when it is considered that under an annual policy, 
covering a vessel which is operating over a route subject to sea- 
sonal hazards, the major part of the total hazards incurred 
during the poUcy term, may be encountered in three months, 
while during the remaining nine months the vessel is operating 
over comparatively safe waters. To determine how much of 
an annual rate applied to any portion of the annual period would 
be merely an estimate, the underwriter having named an average 
rate for the entire year. The same reasoning is applied to other 
forms of policies. It is upon this theory that return premiums 
are not allowed when the insured subject is destroyed during the 
policy term by a peril not insured against. Thus in the case of 
an annual marine poKcy on a hull no return premium is aUowed 
if the insured vessel is destroyed by a war peril. To avoid this 
rule of law specific provisions for the return of premium under 
certain circumstances are found in policies, but these clauses 
will be considered in the special discussion of cargo and hull 
insurance. 

Proofs and Payment of Loss. — ^The next subject referred to in 
the policy is that of losses, the form reading, 

"And in case of loss, such loss to be paid in thirty days after proof of 

loss, and proof of interest in the said (the subject matter of the 

insurance) (the amount of the Note given for the premium, 

if unpaid, being first deducted), but no partial loss or particular average 
shal in any case be paid, unless amounting to five percent^' 

Two requirements are thus imposed upon the claimant before 
there is any obUgation on the part of the underwriter to make 
settlement of loss. First the claimant must furnish proof of loss 
and second he must prove an interest in the insured subject. 



160 MARINE INSURANCE 

The usual form of proof to establish the first point is the protest 
of the master of the vessel. This document is in affidavit 
form, in which the master sets forth before a notary or other 
person commissioned to administer oaths, the incidents of the 
voyage, laying special stress on particular perils encountered 
which would probably result in damage to the vessel and its 
cargo. This protest is usually made in short form immediately 
on arrival at the first port after disaster has occurred, the protest, 
if necessary, being "extended " as it is called, later on when a more 
detailed description of the events occurring at the time of the 
casualty is given. The protest receives its name from the fact 
that in the document the master protests that whatever damage 
may have been sustained, happened through no fault or breach 
of duty on his part. The log of the vessel may also be examined 
to establish the facts in regard to the cause of loss. 

Proofs of Interest. — Proof of interest is ordinarily made by 
offering to the underwriter the invoice and the bill of lading, the 
former document determining the basic value of the commodity, 
the latter proving that the goods were actually on board the 
vessel which has been overtaken by disaster. If a certificate of 
insurance has been issued this document is offered as a proof 
of insurance, or if a certificate has not been issued the policy itself 
is presented to the underwriter in evidence. Other docmnents 
may also be required. Thus in the case of hull insurance, the 
certificate of enrollment may be presented to prove by a govern- 
mental document, the ownership of the vessel, or in the case of 
freight insurance the freight list or the charter party may be 
offered to prove the amount of freight at risk. 

Adjustment of Loss. — Having presented these proofs of loss 
and proofs of interest in proper form, the loss, if a claim under the 
policy, is due and payable thirty days after such presentation. 
Whether or not such loss is a claim under the poUcy is determined 
by the underwriter's adjustment, the method of preparing which 
will be considered in the discussion of losses. This adjustment 
may be made by the underwriter himself or if loss happens at a 
distant place, the documents may be presented to the under- 
writers' agent who may make the adjustment. Sometimes 
the agent will give merely a certificate showing the apparent 
cause and extent of the damage. This document is attached 



THE POLICY. SUE AND LABOR CLAUSE 161 

to the other proofs of loss and the claim is sent to the under- 
writer for adjustment. Whether or not the adjustment will 
show a valid claim under the poUcy depends primarily on two 
facts. First, was the proximate cause of the damage or loss 
suffered one of the perils insured against, and second does the 
amount of the loss equal or exceed five percent. If both these 
facts cannot be established there is no claim under a policy issued 
in the form under consideration. If these facts are both estab- 
lished, then if the premium is unpaid or if the note given for it 
is unpaid such premium will be deducted from the amount of the 
loss and the balance if any will be due and payable thirty days 
from the day complete proofs were presented to the underwriter. 

Average Clauses. The Franchise. — The words in the loss 
clause reading, ''unless amounting to five percent'' open up one 
of the most interesting and important questions in the realm of 
marine insurance. The fixing of the percentage of average or 
loss, sometimes called the franchise, requires a considerable 
degree of skill and an intimate knowledge of the intrinsic qualities 
of property to be insured. Five percent in most American 
poHcies or three percent in the English form is fixed as the 
general minimum damage which must be incurred to permit a 
valid claim under the poUcy, but this percentage having been 
reached, the underwriter assumes liability for aU the damage 
suffered through a peril insured against. 

Deductible Average Clauses. — It may be, however, that the 
average clause is so worded that the minimum percentage or 
amount when reached is not allowed as a claim, but is deducted 
from the total amount of the claim, the excess over and above 
what is known as the deductible franchise being paid. These 
deductible average clauses are worded in a variety of ways, such 

as: "Subject toa deductible average of percentor $ ^' 

or "Free of particular average under percent, which is 

deductible." Deductible average clauses naturally result in 
lower rates as a greater measure of responsibility remains with 
the assured, than is the case with the ordinary form of average 
clause. 

Purpose of Average Clauses. — The reasons for inserting ave- 
rage clauses in policies are in the main twofold. The principal 
reason is to relieve the underwriter of the inevitable losses to 



162 MARINE INSURANCE 

which certain property from its very nature or mode of shipment 
is subject, thus preventing a multiplicity of petty claims. These 
clauses also relieve underwriters from the annoyance and expense 
of adjusting petty claims, which while fortuitous in their char- 
acter are nevertheless trifling in amount. The elimination 
of these claims results in a net saving to the assured, as the 
increased cost of insurance necessary to provide for the expense 
of making these adjustments would far exceed the amount of 
the losses themselves. This will be evident when consideration 
is given to the files of documents which transportation companies 
have in connection with some petty claims, the postage alone on 
which is often many times the amoimt of the claim itself. When 
to this expense is added the cost of paper, notary fees, and the 
salaries of those who are charged with the adjustment of the 
losses, the economic advantage of eliminating petty claims in 
marine insurance will be apparent. 

Average Clauses Reduce Cost of Insurance. — The second 
reason for inserting average clauses is to reduce the cost of in- 
surance. An underwriter may be wiUing to grant a minimum 
average of say five percent on a certain commodity, but the cost 
of such insurance from the standpoint of the merchant is pro- 
hibitive. He accordingly is oftentimes willing to assume a 
greater percentage of partial loss, in order to obtain a lower rate 
which will enable him to carry out his contract without financial 
loss. Or it may be that the merchant from his intimate knowl- 
edge of the commodity and its mode of shipment is confident 
that it will result in a net saving to him to pay a reduced rate 
for insurance and to assume the liabiUty for partial losses. The 
method used to amend policies so as to relieve underwriters 
of a measure of their customary liability is to insert in the con- 
tract an average clause which modifies or overrides the average 
clause in the printed form. Such clauses may contain a fran- 
chise as high as ten percent, twenty percent or even fifty 
percent, or may be deductible in their form, or may be so worded 
as to eliminate all claims unless a definite named casualty occurs, 
as in the case of the common F.P.A.A.C. (free of particular 
average American conditions) clause, as it is known, reading, 
"Free of particular average unless caused by stranding, sinking, 
burning, or collision with another vessel.'' 



THE POLICY. SUE AND LABOR CLAUSE 163 

Double Insurance. — The next section of the printed form deals 
with the subject of prior, simultaneous and subsequent insurance. 
Herein is found one of the principal differences between American 
and British insurance practice. The clause in question reads: 

''Provided always, and it is hereby further agreed, that if the said 
assured shall have made any other assurance upon the premises afore- 
said, prior in day of date to this policy, then the said In- 
surance Company shall be answerable only for so much as the amount 
of such prior, insurance may be deficient toward fully covering the 

premises hereby assured; and the said Insurance Company 

shall return the premium upon so much of the sum by them assured, as 
they shall be by such prior assurance exonerated from. And in case of 
any insurance upon the said premises, subsequent in day of date to 

this pohcy, the said Insurance Company shall nevertheless 

be answerable for the full extent of the siun by them subscribed hereto, 
without right to claim contribution from such subsequent assurers, 
and shall accordingly be entitled to retain the premium by them re- 
ceived, in the same manner as if no such subsequent assurance had been 
made. Other insurance upon the premises aforesaid, of date the same 
day as this policy, shall be deemed simultaneous herewith; and the 

said Insurance Company shall not be liable for more than a 

rateable contribution in the proportion of the sum by them insured 
to the aggregate of such simultaneous insurance.'' 

Little need be said in explanation of this portion of the policy. 
The American theory of double insurance as herein set forth is 
that if insurance has been effected prior in day of date to the 
policy in question the underwriter shall be relieved of all liability 
for loss except in so far as the prior policy is deficient in amount, 
not fully protecting the property insured. The insurance com- 
pany agrees to return premium on so much of the amount as is 
overinsurance. If there are two or more policies on the same 
property and aggregating in amount more than the insured 
value of it, simultaneous in day of date, then the various 
underwriters become co-insiu^rs, each agreeing to be respon- 
sible for his pro rata proportion of the loss and each retaining 
his pro rata share of the premium. If the policy in question, 
however, is prior in date to any other policy then the under- 
writer agrees to assume full responsibility for loss to the amount 
of his policy, and is entitled to retain the full premium charged. 



164 MARINE INSURANCE 

Theory of Double Insurance Different in Great Britain. — 

This principle of double insurance is quite different from the 
practice in Great Britain where the priority of the date of a 
policy has no control over its validity. An assured may be very 
much overinsured, in fact after having placed the risk in full 
with one underwriter, he may again insure it with a second under- 
writer, each of whom is liable in the event of loss for the entire 
amount of his poUcy. The assured, however, cannot collect his 
loss twice and the two underwriters stand in the position of 
sureties one for the other, he from whom the loss has been col- 
lected having a vaUd claim upon the other underwriter for a 
rateable contribution to the loss. The English doctrine is set 
forth in the following words in Section 80 of the Marine Insurance 
Act — 

80. (1) Where the assured is overinsured by double insurance, each 
insurer is bound, as between himself and the other insurers, to con- 
tribute rateably to the loss in proportion to the amount for which he is 
liable under his contract. 

(2) If any insurer pays more than his proportion of the loss, he is 
entitled to maintain an action for contribution against the other in- 
surers, and is entitled to the like remedies as a surety who has paid more 
than his proportion of the debt. 

Under Insurance. — Closely analogous to the subject of double 
insurance or over insurance is that of under insurance. Here the 
rule in America and England is the same and is succinctly stated 
in section 81 of the Insurance Act in the following words: 

81. 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. 

This rule is peculiai: to marine insurance. The insurer in the 
case of fire insurance where the customary form of imvalued 
policy is used, is Uable for the entire loss not exceeding the amount 
of his policy or not exceeding the real value of the insured sub- 
ject whichever amount is the smaller. Fire insurance has in 
certain cases adopted marine insurance practice, inserting in 
policies the so-called co-insurance or average clauses, by which 
under certain conditions the assured becomes a co-insurer with 



THE POLICY. SUE AND LABOR CLAUSE 165 

his underwriter. The motive for using such clauses in fire poli- 
cies is primarily to produce premium, in that to escape the effect 
of the co-insurance clause the assured must carry insurance equal 
in amount to a certain fixed percentage of the value of the in- 
sured property. The higher this percentage is the lower the rate 
of insurance. The principle of co-insurance in marine imder- 
writing, however, is fundamental and applies in all cases. 

Insurance on Same Property Covering Different Risks. — Care- 
ful distinction should be made between double insurance and in- 
surance imder two or more policies, each one of which, while 
relating to the same property, covers different risks to which that 
property is subject. Thus in the case of three policies, the first 
covering total loss and liability under the Free of Average Elnglish 
conditions clause, the second other partial losses or *' difference in 
conditions" as it is known and the third, war risks, each under- 
writer is responsible for the particular losses against which he 
provided insurance. 

Carrier's Liability. — ^At this point there is inserted in many of 
the printed forms in use by the several companies, clauses worded 
in various ways the general intent of which is to make the policy 
null and void in the event of there being other insurance on the 
property, furnished by a transportation company under its bill 
of lading, or otherwise, except in so far as such carriers' insurance 
may be deficient to cover the loss incurred. Similar provision 
is made in regard to fire insurance prior to loading on or after dis- 
charge from the vessel. The purpose of these clauses will be 
considered when the question of losses is discussed. 

Illicit or Prohibited Trade. — Insurance companies, in order to 
protect themselves from unwittingly assuming liability for losses 
caused by perils against which they do not wish to give protection, 
have inserted in the printed policy certain modifying clauses which 
except them from such liability. The first of these clauses reads: 

'' It is also agreed, that the property be warranted by the assured free 
from any charge, damage or loss, which may arise in consequence of a 
seizure or detention, for, or on account of any illicit or prohibitedtrade, 
or any trade in articles contraband of war." 

It will be noted that this clause refers only to losses occasioned 
by seizure or detention due to illicit or prohibited trade, or to 



166 MARINE INSURANCE 

trade in articles contraband of war and does not refer to seizure 
or detention in general. It would also appear that there must 

be read into this clause *'loss ^which may arise 

for, or on account of any ^trade in t?ie goods hereby 

insuredy" otherwise an innocent shipper might be prejudiced by 
the seizure and detention of his goods merely because they 
happened to be in the same vessel with other goods liable for 
seizure or detention on account of illicit, prohibited or con- 
traband trade. Trading in contraband presupposes a state of 
war, but an iUicit or prohibited trade may exist in time of peace. 
Such illicit or prohibited trade refers particularly to traflSc which 
is illegal under the laws or regulations of foreign ports. While 
it is legal to insure articles of trade in violation of foreign ordi- 
nances, unless such ordinances by treaty are respected by the 
country wherein the policy is issued, it is illegal to insure contrary 
to the laws of the country or state wherein the contract of insur- 
ance is made. 
Abandonment — The second of the modifying clauses reads: 

'^ Warranted not to abandon in case of capture, seizure, or detention, 
until after condemnation of the property insured; nor until ninety days 
after notice of said condemnation is given to this Company. Also 
warranted not to abandon in case of blockade, and free from any expense 
in consequence of capture, seizure, detention or blockade, but in the 
event of blockade, to be at liberty to proceed to an open port and there 
end the voyage." 

The subject of abandonment is one which may be considered 
more logically in connection with the discussion of total losses. 
It will be sufficient at the present point to state that by an aban- 
donment the assured transfers to the underwriter his right, title 
and interest in whatever remnant of property may remain after 
an insured peril has occurred. The underwriter receives the 
property, if abandonment is accepted, subject to all liens and 
encumbrances which may have attached to it, and subject also, 
to all benefits or claims against third parties arising out of 
ownership in such property. 

Purpose of Abandonment Clause. — The primary purpose of 
the present clause is to make it impossible for an assured, when 
his vessel or cargo is taken by a belligerent, to avoid the obliga- 



THE POLICY. SUE AND LABOR CLAUSE 167 

tion which he owes to his underwriter to use all means to obtain 
the release of the vessel or cargo. He cannot consider that his 
property has become a total loss and abandon it to the under- 
writer. This is merely a further illustration of the general 
principle that marine insiu'ance seeks to indenmify the assiu^d 
for actual losses suffered, but does not purpose to reUeve the 
assured of the care which a prudent uninsured owner would 
exercise with respect to his property under similar circumstances. 
Even if condemned under legal proceedings the assured agrees in 
this clause, not to abandon until the expiration of ninety days, 
from the time of notice of such condemnation is given to his 
underwriter. This precaution is taken in order that appeal 
may be made from the judgment of condemnation and that addi- 
tional efforts may be made to effect the release of the insured 
property. 

Liability for Expenses. — ^The underwriter also expressly war- 
rants that he will not be liable for any expense that may be 
occasioned to the assured in consequence of capture, seizure, 
detention or blockade. Such expenses remain at the risk of the 
assured, notwithstanding the fact that the poUcy covers the peril 
with which such expenses are associated. The mere fact of 
capture, seizure, detention or blockade does not imply that the 
property is lost. The subject of insiu'ance is lost and the loss is 
recoverable imder an insurance poUcy only when the property is 
legally condemned and permanently taken from the assured. 
Up to this point the underwriter is only indirectly concerned, in 
that the preliminary seizure may result in the condemnation and 
loss of the property. Being thus interested it is customary for 
him to lend his aid and give his advice concerning ways and 
means of obtaioing release of the insured property and thus 
preventing the consummation of the loss. 

Liberty to Deviate in Event of Blockade. — In order that the 
poUcy may not be voided by the application of the doctrine of 
deviation, Uberty is expressly granted for a vessel in the event of 
blockade, to proceed to an open port and there end the voyage. 
Here again the way is made clear to effect the saving of imperilled 
property, by providing a way of escape which will in no wise 
invalidate the insurance. However, a deviation made to escape 
the peril of blockade must be a reasonable one, the assured not 



168 MARINE INSURANCE 

being permitted under cover of this clause to substitute an 
entirely new voyage. 

The Attestation Clause. — Following these modifying clauses 
there appears in the printed form under consideration, the 
attestation clause reading: "In witness whereof, the President 

or Vice President of the said Insurance Company hath 

hereunto subscribed his name, and the sum insured, and caused 
the same to be attested by their Secretary, in New York, the 

day of one thousand nine hundred and " 

As already indicated, the policy in which both the assured and the 
company agree to perform certain obUgations, or to refrain from 
committing certain acts, is signed only by the authorized agents 
of the Company. The assured by signing the preUminary appli- 
cation and by the acceptance of the formal contract as embodied 
in the policy assents to the obligations which the contract 
imposes upon him. 

Memorandum Clause. — Hie signatures of the officers of the 
company do not inmiediately follow the attestation clause, for we 
find a clause headed "Memorandum" which materially modifies 
the contract terms and incidently gives the first intimation that 
the marine insurance poUcy is concerned with general average 
losses. The Memorandum clause was first introduced into 
London policies in 1748 and is now in one form or another a part 
of all cargo policies. Its consideration will be reserved for the 
following chapter so that it may receive the attention which its 
importance deserves. 

Underwriter Retains Premium on Risk Unwittingly Insured 
After Arrival. — The last two sentences of the policy, however, 
may be considered at this point. The first is the complement 
of the phrase "lost or not lost" and reads: "If the voyage 
aforesaid shall have begun and shall have terminated before 
the date of this poUcy, then there shall be no return of premium 
on account of such termination of the voyage." Here again 
we must read into the contract modifying words to the effect 
that the voyage has been begun and ended "without the knowl- 
edge of either party." It seems only fair that if the underwriter 
assumes a risk on property which at the date of the policy may 
have ceased to exist, as he does under the "lost or not lost" 
clause, then he should be entitled to retain premium on a poUcy 



THE POLICY. SUE AND LABOR CLAUSE 169 

innocently issued on a terminated risk. Were this not so, the 
underwriter could be held for a loss which happened prior to 
the date of the policy, under the "lost or not lost" clause, but 
would receive no premium on a risk which terminated without 
loss prior to the date of policy. 

Resume. — The final sentence reads: "In all cases of return of 
premium, in whole or in part, one-half percent upon the sum 
insured, is to be retained by the assurers." This provision 
is obsolete. Its original purpose may have been to afiford the 
insurance company, in the event of cancellation, some re- 
muneration for the time and expense involved in the issuance of 
the policy. The absurdity of this clause in modern practice 
will be apparent, when it is considered that in many cases, 
the rate premium is considerably less than one-half of one per- 
cent, and were the clause to be enforced literally, the cancella- 
tion of the policy would result not in the payment of a return 
premium to the assured, but in the payment of additional 
premium by the assured. 

After entering the amount insured in both figures and words 
on the last line of the policy, the signatures are affixed and the 
document becomes a formal policy of marine insurance. The 
subjects which have been considered in this and the preceding 
chapters are merely the customary clauses which are found 
in all cargo policies. There is no limit to the modifying stipula- 
tions and warranties which may be added to a policy to change 
the printed form. In fact in many cases the modifications 
take more space than does the original matter. Added to these 
written variations, there are the implied warranties which unless 
waived, apply to all policies. In the following chapters consid*- 
eration will be given to these modifications as they apply to poli- 
cies generally and to specific forms of insurance on cargo, hull, 
freight and other insurable interests. 



CHAPTER 10 

THE MEMORANDUM CLAUSE. IMPLIED AND EX- 
PRESSED WARRANTIES. REPRESENTATION 

AND CONCEALMENT 

All Goods Not Equally Susceptible to Damage. — It will have 
been observed that a poUcy form which on first reading seemed 
to give protection against practically all misfortunes to which 
property at sea may be subjected, is by interpretation more or 
less restricted with respect to the nature of the casualties against 
which it provides indemnity, and as to the minimum amount of 
loss for which responsibility is assmned. Notwithstanding these 
restrictions, underwriters early discovered that while the pro- 
tection afforded might be suitable for some subjects of insurance, 
with respect to others it merely resulted in the underwriter 
assuming responsibiUty for losses which, although the result of 
insured perils, produced claims out of all proportion to the 
severity of the casualty suffered. In other words experience 
demonstrated that certain kinds of goods when exposed to sea 
perils deteriorate rapidly, causing unlooked-for losses which it 
was not prudent for an underwriter to assume. It was often 
difficult with such goods to determine whether in the event of a 
minor casualty, the consequent loss was due to the inherent 
quaUties of the article itself or whether the deterioration was 
the proximate result of the casualty. 

A Uniform Rate of Premium Desirable. — In the early days of 
marine insurance, clauses were devised which reUeved under- 
writers of all partial loss on certain goods, and of small partial 
losses on other goods less susceptible to damage; the apparent 
purpose of this being to arrive at a basis of insurance which would 
make the liability under the policy on all kinds of goods as 
nearly equal as possible, permitting the charging of a uniform 
rate. Whether or not this was the primary purpose of these 
clauses, the fact remains that it is impractical to devise any 
system of insurance which will result in the underwriter assuming 

170 



THE MEMORANDUM CLAUSE 171 

the same degree of risk, no matter what the insured subject 
may be. 

The Memorandum Clause. — It is possible that the clauses 
of this nature in use in the eighteenth centiuy were combined 
in 1748 when the first memorandum clause appeared in London 
policies. Today the clause appearing in the Lloyd's form is 
comparatively short, but general in its terms, whereas in the 
memorandum clauses found in American poUcies, a more specific 
eniuneration of commodities is found. Some of the lists are 
exceedingly long and embrace most of the common and uncom- 
mon articles of commerce. These lists are followed by general 
words intended to include all other articles of the same general 
characteristics and susceptibility to damage which may by chance 
have been omitted in the specific enumeration. The memo- 
randmn clause appearing in the printed form which was 
considered in the previous chapters is in the following words: 

Memorandum. — It is also agreed, that bar, bimdle, rod, hoop and 
sheet iron, wire of aU kinds, tin plates, steel, madder, sumac, wicker-ware 
and willow (manufactured or otherwise), salt, grain of all kinds, tobacco, 
Indian meal, fruits (whether preserved or otherwise), cheese, dry fish, 
hay, vegetables and roots, rags, hempen yarn, bags, cotton bagging, 
and other articles used for bags or bagging, pleasure carriages, household 
furniture, skins and hides, musical instruments, looking-glasses, and all 
other articles that are perishable in their own nature, are warranted by 
the assiu-ed free from average, unless general; hemp, tobacco stems, mat- 
ting and cassia, except in boxes, free from average under twenty per^ 
cent unless general; and sugar, flax, flax-seed and bread, are warranted 
by the assured free from average under seven percent unless general; 
and coffee in bags or bulk, pepper in bags or bulk, and rice, free from 
average under ten percent unless general. 

Warranted by the insured free from damage or injury, from dampness, 
change of flavor, or being spotted, discolored, musty or mouldy, except 
caused by actual contact of sea water with the articles damaged, occa- 
sioned by sea perils. In case of partial loss by sea damage to dry goods, 
cutlery or other hardware, the loss shall be ascertained by a separation 
and sale of the portion only of the contents of the packages so damaged, 
and not otherwise; and the same practice shall obtain as to all other 
merchandise as far as practicable. Not liable for leakage on molasses 
or other liquids, unless occasioned by stranding or collision with another 
vessel. 



172 MARINE INSURANCE 

General Average Introduced into Marine Policy. — It will be 
noticed that some of the articles are by inference only insured 
against total loss, that is they are "free from average/' while 
other articles considered less susceptible to damage are subject 
to partial loss if such partial loss amounts to twenty, seven or 
ten percent of the insured value. But whatever may be the 
percentage of damage due to partial loss which is necessary to 
allow a claim under the poUcy, one kind of loss is unrestricted 
and is payable irrespective of percentage. Each group of com- 
modities ends with the words "unless general." This, the first 
reference in the policy to general average gives notice that 
losses in the nature of general average wiU be paid in full by the 
underwriter. 

Excepted Risks. — ^The second paragraph of the memorandum 
clause is more modern and no words of similar import appear in 
the Lloyd's form of policy. It was discovered that certain com- 
modities because of their nature readily absorbed odors which 
might be given oflf by the cargo, and in the case of extremely 
perishable articles their value in the market was completely 
destroyed. Other goods would become spotted, discolored, 
musty or mouldy or might be damaged merely because of moist 
atmosphere in the hold. Then again the vessel might leak and 
damage certain cargo, such as hides or skins, which would quickly 
begin to rot, and Jv^ off offensive odors which would penetrate 
the vessel and be absorbed by other articles which had not been 
directly affected by the casualty. Underwriters having been 
held liable in certain cases for such consequential loss, the clause 
under discussion was inserted to restrict the habiUty of under- 
writers for losses of this nature to such as are the direct result 
of the insured subject itself being in actual contact with sea 
water, the sea water obtaining entrance to the cargo through a 
sea peril. 

The Separation of Damaged Goods. — ^Furthermore, the under- 
writer requires that, in case of damage to property which is 
capable of being separated into units, such segregation must be 
made and the assured must be content with an adjustment of 
the loss, in accordance with the terms and conditions of the 
policy, on the damaged portion only. Thus in the case of 
cutlery, each piece of which is ordinarily wrapped separately 



THE MEMORANDUM CLAUSE 173 

and placed ih smaU packages which in turn are combined in a 
large shipping case, if the case is damaged through a peril in- 
sured against, the individual units must be separately handled, 
the sound separated from the damaged and claim made on only 
the pieces actually damaged. The imderwriter of course assimies 
the expense of making the separation. The same procedure is 
required in the case of other articles which can be treated in a 
similar manner. The underwriter also provides in this paragraph 
that there shall be no liability on his part for loss of molasses 
or other liquids through leakage, unless such leakage is the direct 
result of stranding or of a collision with another vessel. 

Insurance Does Not Restore Property, — It must ever be re- 
membered, that the loss of property is an economic loss to the 
world. Marine insurance does not make good that loss, it 
merely serves to distribute the shock caused by the loss. It 
therefore is the duty of the assured as well as the underwriter, 
to use every means to preserve property from damage and to 
restore it when injured to a state of commercial usefulness, if 
such preservation or restoration can be accomplished at a cost 
which will result in a net economic gain. Too often it is felt 
that the destruction of property, if insxu'ed, is of little moment to 
the assured or to the public in general, the fact being lost sight 
of that every destruction of property of real value reduces by 
that amount the total wealth of the world. Compensation 
made by an insurance company for such loss does not create new 
wealth to offset the loss, it merely transfers from the underwriter 
to the assured a sum which has been set aside from the wealth 
of the world to aid the particular individual who has suffered. 
Thus the assured from the point of view of public policy is bound 
to take every precaution to prevent loss, and to minimize it if 
it does occur, and the underwriter is under no less obligation 
to insist that the assured perform his duty in this respect. Many 
assured have the mistaken notion that insurance relieves them 
of any further concern in regard to their property, entirely losing 
sight of the part which insurance plays in commercial life. 

Implied Warranties, — ^While the printed and written form of 
policy sets forth the terms of the contract between the assured 
and the underwriter, this agreement is subject to what are known 
as implied warranties, These implied warranties are agreements 

13 



174 MARINE INSURANCE 

not embodied in the terms of the policy, but read into it by law. 
That is, the parties to the contract agree by implication when 
making the insurance that certain conditions exist and that 
certain well-defined rules will be followed in the conduct of the 
voyage. These impUed warranties are the result of law court 
decisions of the preceding centuries with respect to marine in- 
surance policies, which decisions are in many cases merely the 
embodiment into legal form of the customs and usages of mer- 
chants, and become just as binding on the assured and on the 
underwriter as matters definitely expressed in the body of the 
policy. 

Implied Warranty of Legal Conduct. — There is usually included 
in the list of implied warranties the agreement that the voyage 
will be legally conducted. This is not an implied warranty in 
the strictest sense of the word, since it is common to all contracts 
that the law of the land in which the agreement is made will not 
be contravened in the carrying out of the contract terms. The 
law of the land consists not only of the domestic laws of the 
country but also included international law and agreements and 
regulations laid down in treaties to which the nation is a party. 
It should be noted, however, that commercial adventures during 
their course may come within the protection or the power of the, 
laws of foreign governments, but it is within the rights of the 
assured and his underwriter to bargain in regard to a voyage 
or with respect to a shipment which may be made in violation 
of foreign edicts, and there is no implied warranty to prevent it. 
This so-called warranty of legality differs from all other implied 
warranties, in that the parties cannot mutually agree to waive 
the warranty and make it of no effect. The waiver of the im- 
plied warranty of legaUty is against pubUc policy and will not be 
tolerated. Insurance which involves the illegal conduct of the 
assured or of the underwriter must not be confused with insur- 
ance against the illegal conduct of third parties, as in the case 
of barratry, theft, pirates or rovers. Such insurance is, of course, 
valid. 

Seaworthiness. — The most important of the implied warrant- 
ies is that of seaworthiness. In order that this implied warranty 
may be complied with, it is necessary that the vessel be properly 
constructed, conducted and found, for the carrying of the speci- 



THE MEMORANDUM CLAUSE 175 

fied cargo insured on the particular voyage described. Nothing 
is more difficult than to determine that a vessel is unseaworthy 
in advance of its destruction. Underwriters' surveyors may 
think that one boat is unseaworthy, while they may decide that 
another is seaworthy. The first vessel may make her passage in 
safety while the second may be lost. Such expressions of sea- 
worthiness are mere matters of opinion, and while underwriters 
to a certain extent give weight to these opinions in forming theh: 
judgment, nevertheless they are not conclusive nor presumptive 
evidence of either the seaworthiness or unseaworthiness of the 
vessel. 

Tests of Seaworthiness. — The question is a deeper one than 
any mere matter of opinion. Seaworthiness involves questions 
which a survey of the vessel may not reveal. The strength and 
intrinsic qualities of the material used in the construction of 
the vessel, the fastenings, the workmanship, the model of the 
vessel, the engine equipment, the fuel and food supply, the com- 
petency and experience of the master and the crew, the suita- 
bility of the vessel at the particular season of the year for carry- 
ing the particular kind of cargo in question on the proposed 
voyage are some of the many elements which may be involved 
in the question of seaworthiness. Often the best evidence of 
unseaworthiness is the fact that the vessel without apparent 
external cause is lost. Seaworthiness is a question of fact which 
in the last analysis can be determined only by a court of law. 

No Fixed Standard of Seaworthiness. — The standard by 
which seaworthiness is judged is a changeable one and may vary 
with any particular vessel at difiFerent periods of the same voyage. 
A vessel might be perfectly seaworthy to load and carry a cargo 
while lying safely in a sheltered port. In fact it might be per- 
fectly seaworthy to carry the cargo from a river port at which it 
was loading down to the open sea, but having reached the open 
sea be absolutely unseaworthy for the remainder of the proposed 
voyage. There is a different standard for every ocean, and the 
same measm-e of seaworthiness will not apply to all parts of a 
given ocean or to all times in the same part of the ocean. A 
vessel fit for Atlantic coastwise trade may be unseaworthy for 
trans- Atlantic trade. So, too, a vessel suitable for trans-Atlantic 
trade in the summer season may be an unseaworthy risk in the 



176 MARINE INSURANCE 

winter months. Then again a ship might be considered fit 
to carry a light, non-perishable trans-Atlantic cargo in the winter, 
and yet be absolutely unfit to carry a heavy perishable cargo over 
the same route at the same season. There is no fixed and 
predetermined standard for any particular vessel, trade or route, 
except in so far as the necessity of being properly constructed, 
conducted and found may be considered as a fixed standard. 

Seaworthiness Refers to Inception of Risk. — It must be ob- 
served that the implied warranty of seaworthiness extends not 
alone to those quaUties and defects which are apparent, but also 
to qualities and defects which are unknown to the assured. The 
impKed warranty of seaworthiness refers primarUy to the incep- 
tion of the risk. It is the condition of the vessel at this time, 
judged in the light of the cargo it is to carry and the voyage upon 
which it is about to enter, that determines seaworthiness. If, 
however, the voyage is divisible into stages, and a different 
standard applies to each stage, then it may be that each particular 
portion of the risk would be separately considered. A tempo- 
rary condition of unseaworthiness, wiU not necessarily void a 
policy, but may suspend the insurance only during the continu- 
ance of such condition, if the defect can be remedied at the port 
of departure. The risk having commenced, and the vessel 
being in a seaworthy condition, the happening of some fortuitous 
event, rendering the vessel unseaworthy will in no wise void the 
policy. 

Implied Warranty of Seaworthiness not Applicable to Hull Time 
Risks. — ^While the doctrine of seaworthiness appUes equally to 
cargo, freight, profit and other forms of marine insurance and to 
huU insurance written on the trip or voyage basis, the courts 
have decided that in general there is no impUed warranty of sea- 
worthiness with respect to hull insurance written on time. In 
England this principle is settled, but in this country there are cer- 
tain exceptions to the rule. When the exact location of a vessel is 
unknown because it is at sea, it is obvious that the facts on which 
an implied warranty of seaworthiness would depend might not 
be provable. There is, therefore, no ground for insisting on the 
implied warranty if the policy attaches when the vessel is at sea. 
On the other hand, there would seem to be no sufficient reason 
why the doctrine of seaworthiness should not apply on a time 



THE MEMORANDUM CLAUSE 177 

risk attaching while the vessel is in port. It is possible for an 
underwriter to make any impUed warranty an expressed war- 
ranty. An expressed warranty of seaworthiness in a time hull 
policy would, therefore, be proper, but if the vessel were at sea at 
the inception of the risk, there would be great difficulty in es- 
tablishing by proof its unseaworthiness. 

The Waiver of Warranty of Seaworthiness. — In the days when 
it was usual for a shipowner to load his vessel with his own cargo, 
or when the cargo owner chartered a vessel to carry his goods, it 
seemed natural and justifiable that the warranty of seaworthi- 
ness should be read into the insurance contract. The cargo 
owner chose the vessel which was to carry his goods, and it was a 
fair presumption that he knew its condition and equipment. 
Now, however, with the establishment of steamship Unes and 
with the great increase in size and carrying capacity of vessels, 
it is somewhat of a hardship for the cargo owner to receive in- 
surance subject to an implied warranty of seaworthiness, when 
he knows little about the carrying vessel and is not in as good 
a position as the underwriter himself to find out about its con- 
dition and equipment. Accordingly it is not unusual to find 
in cargo poh^ies a clause reading: "Seaworthiness of the vessel 
as between the assured and the underwriter is hereby admitted." 
This clause in no way waives the implied agreement between the 
assured and the carrier that the latter will furnish a seaworthy 
vessel, and the underwriter imder his right of subrogation will, 
in the event of loss being paid, receive the assured's right of 
action against the carrier if the implied agreement is not 
performed. 

Implied Warranty of Seaworthiness Refers to Vesseli Not 
to Cargo. — ^In this connection it is interesting to note that there is 
no implied warranty of seaworthiness with respect to the cargo 
itself, the warranty runs only against the vessel. Many cargoes 
may be shipped in such bad condition that it may imperil the 
ship. Thus in the case of soft coal which heats readily, or in the 
case of improperly cured vegetable fibre such as hemp, which is 
subject to spontaneous combustion, the mere shipping of such 
cargo would not void the policy, but the underwriter would not 
be Uable for loss by fire if it could be established that the assured 
while aware of the condition of the cargo when shipped, never- 



178 MARINE INSURANCE 

theless negligently permitted its loading in such condition. 
Nor would he be Uable if it could be shown that the fire was due 
to the inherent qualities of the cargo itself. It will be observed 
that a breach of the implied warranty of seaworthiness goes to 
the root of the policy itself and voids the whole transaction, 
whereas losses which may overtake the cargo on account of its 
condition or inherent qualities are the only ones from which the 
underwriter is exonerated, other perUs insured agamst remaining 
at his risk. 

Proof of Breach of Warranty of Seaworthiness. — While it is 
true that the implied warranty of seaworthiness is the most 
important and far reaching of all the implied warranties, it is 
equally true that it is more difficult to prove a breach of this 
warranty than it is to prove the breach of the others. Some cases 
readily demonstrate a condition of unseaworthiness, as when a 
vessel shortly after leaving port, founders in clear weather and 
a calm sea. But in the vast majority of cases there is some dis- 
tiu'bed condition of the sea or of the elements existing at the time 
the vessel is lost, and to prove that the loss was due to the unsea- 
worthiness of the vessel and not solely to the unusual action of 
the forces of natiu'e on a seaworthy vessel is a matter of no little 
difficulty. The safe rule for the underwriter to follow is to 
insure only by vessels which he is reasonably sure ^e fit for the 
proposed work, and not to insure doubtful vessels and then rely 
on the breach of an implied warranty to make void the policy 
and prevent the collection of a loss. It is imprudent for an under- 
writer to state that a vessel is unseaworthy, even if he believes 
such to be the case, as the owner of the vessel may sue him for 
damages occasioned by the publication of such adverse opinion, 
and the underwriter may be unable to estabUsh in defense, that 
his opinion was justified by the existing facts. 

Implied Warranty of Prompt Attachment of Risk. — There is 
in all poUcies, except those written on time, an implied warranty 
that the risk will attach within a reasonable time. The insurance 
does not necessarily attach from the time the policy is issued. 
It may relate to a prospective voyage. Nevertheless, in the 
absence of specific information to the contrary the underwriter 
is justified in assuming and usually does assume that the proposed 
venture will commence with due dispatch. The reasons for the 



THE MEMORANDUM CLAUSE 179 

rule are obvious. It has already been suggested that the measure 
of risk existing in a given port or over a named route is not the 
same at all seasons of the year, and an underwriter in taking a 
risk has in mind and bases his rate of premium on the conditions 
existing or Ukely to exist at or about the time the hazard is 
accepted. If, for instance, an assm-ed places in the month of 
August a risk on a vessel to sail from Montreal to Europe the 
underwriter who assmnes the risk, has in mind the hazards exist- 
ing in the port of Montreal and in the river and Gulf of St. Law-i 
rence during the month of August. If, however, the sailing is 
delayed by the assured until the latter part of November, when 
conditions with respect to navigation in these waters are becoming 
extra hazardous, a different risk has been substituted for the one 
the underwriter assumed and he should be and is relieved by law 
from the execution of his contract. Then again, an assiu'ed, 
obtaining insurance on a cargo, may for some market reason or 
otherwise, delay the sailing of the vessel after the loading is com- 
pleted, thus imposing on the underwriter a longer and different 
risk from the one contemplated by him when the risk was as- 
sumed. Under such a state of facts the underwriter will be 
reUeved of his obligation. 

Delay Must be Unreasonable to Void Contract. — Of course, 
in all such cases, the test of whether or not the delay incurred is 
sufficient to void the contract, is the reasonableness or unreason- 
ableness of the delay. This is a question of fact determined in 
the hght of all the circumstances surrounding the case. If the 
delay is the result of mterference or other overt act on the part 
of the assiu'ed a clearer and more easily determined case is f oimd 
than where such delay is solely the result of the action of others 
or because of circumstances over which the assured had no 
control. This warranty is one which works justice to both assm-ed 
and underwriter. On the one hand the assured is not prevented 
from arranging his insurance in advance of the attachment 
of the risk, on the other hand, the underwriter cannot be led 
unwittingly into assuming a risk different from or greater than 
the one to be presumed from conditions which exist at the time 
the risk is taken or are apt to exist in the immediate future. 

Implied Warranty of " No Deviation." — Closely connected with 
the implied agreement that the voyage will be commenced within 



180 MARINE INSURANCE- 

a reasonable time, is the implied warranty that there shall be no 
deviation. The doctrine of "no deviation" has already been 
considered. No further discussion is here necessary except to 
reiterate that the assured, after the risk has once attached, 
cannot substitute a different risk, no matter how slight the dif- 
ference may be or whether or not the substituted risk involves 
a greater or less hazard than did the original voyage, save only 
in the case of excusable deviation. This doctrine is merely the 
statement in specific form of the general legal principle that 
a formal contract cannot be varied without the mutual consent 
of the parties to the contract. 

Other Implied Warranties. — The foregoing are the principal 
implied warranties, although included under this head are some- 
times found impUed conditions such as: "that the assured shall 
have an insurable interest," " that the assured shall not be guilty 
of negligence" and "that the assured shall make a* full disclosure 
of all the pertinent facts in connection with the risk," all of which 
are more in the nature of conditions which must exist in order to 
have a valid contract, than warranties the breach of which will 
void the contract. Formerly there seems to have been an im- 
plied warranty of neutral character and conduct of the voyage, 
but owing to conflicting authority in regard to this question it is 
best to insist on an expressed warranty of neutrality, if the 
underwriter wishes to avoid liability for a breach of neutrality. 

Breach of Warranty May be Excused. — As has already been 
suggested the underwriter may agree to waive any of the implied 
warranties except that of legal conduct, or he may insist on 
making the implied warranty an expressed condition in the 
policy. Furthermore he may excuse the breach of any of the 
implied warranties since all of them are read into the policy by 
law as a measure of protection to the underwriter, which protec- 
tion he is at Uberty to claim or not as he may choose. 

Expressed Warranties. — As the breach of one of the implied 
warranties, unless excusable, will void the policy from the date 
of the breach, so the failure to observe the conditions of an ex- 
pressed warranty will also void it. Thus expressed warranties 
are of the same nature as implied warranties, but are different 
in their form and origin. The implied warranties are read into 
the policy by law, the expressed warranties are written into the 



THE MEMORANDUM CLAUSE 181 

policy by the intention of the parties. The implied warranties 
are few in number, the expressed warranties are without number 
and may relate to any matter whether it be vital to the contract 
or not. Expressed warranties must be strictly and it may be 
said literally complied with. 

Warranties and Stipulations. — ^An expressed warranty may 
relate to a present, past or future condition. It is a written 
agreement that certain facts are or were or shall be true, or that 
certain acts have been or shall be done. It is not essential that 
the word "warranted" be used, it is sufficient that there be an 
allegation of a fact relating to the risk. Thus the expression 
"American Ship Atlas" is an expressed warranty that the Ship 
Atlas is imder the American flag. So, too, the statement that a 
vessel is in port on a named day is a warranty of that fact. 
On the contrary it must not be inferred merely because the word 
"warranted" is used in a clause that the expression is an ex- 
pressed warranty. Thus the common clauses appearing in 
policies such as "warranted free of particular average," "war- 
ranted free of capture, seizure, etc.," are not expressed warranties, 
but merely stipulations in regard to the extent of the under- 
writer's liability. This will be apparent when it is considered 
that if such clauses were expressed warranties, the happening of a 
partial loss, or the mere fact of a capture or seizure taking place 
would absolutely void the policy. 

Expressed Warranties Usually Relate to Material Conditions. 
— Expressed warranties may relate to any matter whether material 
or not if the underwriter insists on the warranty and the assured 
is willing to have the validity of the insurance depend on a 
strict compliance with it. As a matter of practice, however, 
expressed warranties are only inserted in regard to matters of 
really vital concern with respect to the contract. Thus expressed 
warranties relative to sailing are often inserted in policies since 
much depends on the particular period during which a risk is 
exposed to sea perils. Warranties are also inserted agreeing to 
the classification of the vessel in one of the classification societies. 
If such class cannot be obtained the insurance will not attach. 
Warranties in regard to loading are also found, as for instance that 
a vessel will not load more than a certain percentage of her cargo 
on deck, or that her loading will be in conformity with the rules 



182 MARINE INSURANCE 

of a certain Underwriters' Board. There are many warranties 
in regard to war insurance, such as those of neutral ownership and 
consignment, or warranties of convoy. Underwriters usually 
insert only warranties relating to matters imder the control of 
the assured or within the knowledge of the assured. 

Representation, Misrepresentation and Concealment. — Ma- 
rine insurance being founded on the f uUest good faith between 
the contracting parties, it is not surprising that we find many 
decisions relating to marine insurance which refer to what are 
known as representations, misrepresentations and concealments. 
PhiUips in his work on marine insurance defines these words as 
follows: 

Section 524. — ^A representation in insurance is the communication 
of a fact, or the making of a statement, by one of the parties to a con- 
tract of insurance to the other in reference to a proposal for their enter- 
ing into the contract, tending to influence his estimate of the character 
and degree of the risk to be insured against. To constitute a repre- 
sentation, says Mr. C. J. Marshall, there should be an affirmation or 
denial of some fact, or an allegation which plainly leads the mind to an 
inference of a fact. 

Section 525. — ^A fact or statement having such tendency is called a 
material fact or statement. One having no such tendency is called 
immaieridl. 

Section 529. — ^A misrepresentation is a false representation of a 
material fact, by one of the parties to the other, tending directly, to 
induce the other to enter into the contract, or to do so on terms less 
favorable to himself, when he otherwise might not do so, or might 
demand terms more favorable to himself. 

Section 531. — Concealment in insurance is where, in reference to a 
negotiation therefor, one party suppresses, or neglects to communicate 
to the other, a material fact, which, if communicated, would tend 
directly to prevent the other from entering into the contract, or to in- 
duce him to demand terms more favorable to himself; and which is 
known, or presumed to be so, to the party not disclosing it, and is not 
known, or presumed to be so, to the other. 

The Avoidance of Contracts — ^Fraud. — These quotations give 
in brief and lucid terms the underlying conditions with respect 
to these three important elements in the negotiation of insurance 
contracts. If through the exercise of representations, mis- 
representations or concealments the underwriter or the assured 
is induced to enter into a contract which is different from that 



THE MEMORANDUM CLAUSE 183 

which, under the circumstances, he was justified in supposing it 
to be, the law will reUeve him of the burden of the agreement on 
the ground that the minds of the contracting parties did not 
meet, and that, therefore, there could be no contract. It is not 
necessary that representations, misrepresentations or conceal- 
ments be made with fraudulent intent, the mere fact that certain 
conditions are represented or misrepresented or concealed and 
exercise an improper influence, is sufficient to exonerate the 
offended party from his contractual obligations. The law of 
representations, misrepresentations and concealments applies 
not only to direct insurance but is of equal force and effect in 
the case of reinsurance. 

What Must be Disclosed. — ^Air material information whether 
the result of knowledge or rumor should be disclosed. Thus, 
if the assured has heard that the vessel by which he desires 
insurance has met with a disaster, however slight, he must dis- 
close this information to the underwriter. So too the under- 
writer if he knows or has reason to believe that the vessel has 
completed the voyage on which insurance is desired he must 
inform the assured of such knowledge or information. A mis- 
representation or concealment made by an agent without the 
knowledge or consent of the principal is binding on the principal. 
In this manner an insurance broker may prejudice the position 
of his principal. It has been held that a material representation 
by the assured through misconstruction of information is a 
misrepresentation and that unwittingly omitting to state a 
material fact is a concealment. 

The Effect of a Representation. — A representation differs 
from an expressed warranty in that a literal compliance with 
the representation is not essential. It is enough that there be a 
material compUance with the conditions represented. However, 
a literal but not a substantial compliance is not enough. A 
representation continues to be binding until it is revoked. All 
material facts must be revealed and it is wise to reveal all ap- 
parently immaterial facts which have a bearing on the risk as 
the imderwriter may consider such facts of greater weight than 
does the assured. The underwriter is at liberty to ask any 
question in regard to the risk which he sees fit, whether the 
question seem material or not. Oftentimes questions which 



184 MARINE INSURANCE 

seem trivial are asked by an underwriter merely as test questions, 
if he suspects that the assured or his agent is withholding material 
information. As it is the underwriter's capital which is to be 
put at risk, it is proper for him to endeavor to obtain any in- 
formation which he considers necessary, in order to determine 
whether the risk is one which he cares to insure, and if he does, 
to decide what rate is adequate to compensate for the protection 
to be afforded. 

Certain Facts Need Not be Disclosed. — There are, of course, 
limitations to the extent to which the disclosure of material 
facts is necessary. The assured is not bound to disclose facts 
which are matters of common knowledge. Thus, it is not neces- 
sary to disclose usages of trade common to risks similar to the 
one under consideration, nevertheless if there are conditions 
peculiar to the particular risk but not matters of common knowl- 
edge they must be disclosed. The assured need not state that 
other underwriters have declined the risk, although the under- 
writer might consider this an important fact. However, if 
the assured states that other underwriters have accepted part 
of the risk at a certain rate the assured will be bound by such 
representation. If by the statements of the assured, the under- 
writer is put on inquiry and fails to investigate further into the 
matter, he will be bound by the poUcy. 

What A Representation Implies. — A representation is con- 
strued according to the ordinary meaning which the words 
imply and the natural inferences drawn from such representation 
are presumed to be impUed. Thus, if the assured states that a 
vessel was in a certain port on a certain day, it will be presumed 
that the vessel was there and in good safety at some time during 
that day. A representation is, however, to be construed in its 
ordinary sense, and an unusual meaning cannot be read into 
the words. The mere statement by the assured of an expecta- 
tion, opinion, or beUef must be distinguished from a representa- 
tion of a definite fact or condition. If the assured states a fact 
in regard to a risk in such manner that the underwriter naturally 
infers a meaning different from the true meaning it is a mis- 
representation. So too if the assured willfully and fraudulently 
omits to learn material facts, such action amounts to a. 
concealment. 



THE MEMORANDUM CLAUSE 185 

Fraud. — The subject of fraud is closely connected with that 
of representation, misrepresentation and concealment. While 
these latter conditions may exist through an innocent mistake 
or through ignorance on the part of the assured, it often happens 
that the withholding of information or the giving of incorrect 
or misleading information is intentional on the part of the assured 
or his agent. K it can be proved that fraud exists the policy 
will be void from its inception as the minds of the contracting 
parties cannot be considered to have met. On the other hand 
if the giving or withholding of material information has been the 
result of an innocent mistake, the policy will be effected only with 
respect to consequences arising from such innocent action. 



CHAPTER 11 

CARGO INSURANCE AS AN UNDERWRITING 

PROBLEM 

Basic Form of Policy Necessary. — The consideration of marine 
insurance up to this point has been theoretical. The basic form 
of policy common to all branches of the business has been anal- 
yzed, but little consideration has been given to the practical 
application of the imderlying principles governing the practice 
of this particular branch of the insurance science. While it is 
necessary that there be a basic form of contract adaptable to all 
the particular forms of marine insurance, it is equaUy necessary, 
since this branch of insurance is concerned in transactions in- 
volving all types of vessels, all kinds of commodities and all 
parts of the civilized and uncivilized world, that the form be 
sufficiently elastic to accommodate itself to the peculiar problems 
and the individual conditions that surround each particular 
ventm-e. That the basic form is admirably adapted for this 
purpose has been adequately demonstrated by its continued use 
diu-ing the long period in which the commerce of the world has 
been developing. Many times, it is true, the basic form is buried 
under a mass of modifying clauses, but out of the apparent con- 
fusion of words, a definite and understandable contract of indem- 
nity appears. 

Cargo, Hull and Freight Insurance. — Marine insurance may 
be divided into three general sections namely, cargo, hull and 
freight insurance. The practice of insurance as applied to each 
of these three great branches of maritime commerce is so different 
that they must be considered separately. In point of volume 
cargo insurance stands preeminent. The ordinary cargo risk 
being of comparatively short duration, an underwriter's capital 
employed in cargo insurance is turned over many times in a 
single year. Then again in a single venture there will be but 
one vessel, and ordinarily but one freight interest, but if the 
vessel be a general cargo-ship there may be hundreds of cargo 
interests involving many different kinds of goods all exposed to 

186 



CARGO INSURANCE AS AN UNDERWRITING PROBLEM 187 

the same general hazards, but each presenting its special peculiar!* 
ties aa an underwriting problem. In discussing the great mterest 
of cargo it will be best, in the first place to treat it as a general 
problem and then to give special consideration to individual cargo 
interests. 

General and Full Cargoes. — In general, cargo insurance may 
be divided into two broad classes, the one relating to general 
cargoes and the other to cargoes consisting of a single commodity 
usually in bulk form and commonly referred to as full cargo busi- 
ness. The general cargo is one consisting of a variety of com- 
modities shipped by one or by many merchants, while the full 
cargo consists of a single commodity which is usually shipped in 
its entirety by one merchant, or may be made up from the prop- 
erty of several shippers. A vessel taking on a general cargo 
ordinarily loads at the berth, as it is known, and accepts any cargo 
which may be offered for the ports for which the vessel is destined. 
On the other hand full cargoes are ordinarily loaded imder charter, 
where the entire capacity of the vessel is hired out to one mer- 
chant, who for the time being controls the use of the ship. 

Under and On Deck Cargoes. — Cargo insurance may again 
be subdivided into under and on deck cargoes. Under deck 
cargo includes all goods loaded below the main deck of the vessel, 
on deck cargo in its strictest sense referring to aU goods loaded 
above this deck whether under cover or not. By custom all 
cargo stowed below the weather deck is considered to be imder 
deck cargo, as it is no more exposed to the elements than is cargo 
in the hold. Theoretically on deck cargo is not covered miless 
specifically mentioned as being on deck — practically certain 
cargoes from their very nature or from the custom of trade put 
an xmderwriter on inquiry to know whether or not all or part 
of such cargo is on deck. Thus, sulphuric acid — because of its 
hazardous nature — is shipped only on deck, while a full cargo of 
limiber in the ordinary case presupposes a part of the shipment 
on deck, as usually a vessel loaded with lumber will not be in 
proper trim unless a considerable portion of the cargo is on deck. 

A General Eiiowledge of all Commodities Essential. — Each 
particular commodity has its own peculiarities and a full knowl- 
edge of all is essential in order that proper consideration may be 
given to each. Some raw products are shipped in their original 



188 MARINE INSURANCE 

condition while others are put through a preliminary process 
before shipment. Some commodities are shipped in bulk, while 
others are forwarded in packages or wrappers of some kind. The 
same commodity coming from two different parts of the world 
will present two entirely different types of risk. Thus cotton 
exported from the United States is usually shipped in a very poor 
package, the bale being improperly protected by burlap with 
the result that it is apt to arrive at destination in bad condition. 
On the other hand cotton exported from Egypt is in a smaller 
bale perfectly protected by burlap and in the usual course will 
arrive in perfect condition. So we find that rubber shipped from 
Brazil is in chunks while the same commodity imported from the 
Far East is partially refined, fashioned into slabs and carefully 
packed in cases. It, therefore, is not enough that the under- 
writer know that the risk offered to him is cotton or rubber, he 
must be able to look behind the mere commodity and know its 
peculiarities, its physical condition, and the nature of its shipping 
package. 

Marine Insurance Conforms to Trade Customs. — But this is 
not all. Marine insurance does not as a rule create new condi- 
tions. Marine imderwriters may and do strive to improve local 
conditions, but they adapt their form of protection to the customs 
of the country, the usages of the trade and the physical conditions 
existing in the various parts of the world. Thus if the custom of 
the trade or of the country is that goods are sold to exporters at 
the farm or the plantation, insurance will be f lurnished to attach 
at the farm or plantation. If on the other hand the raw com- 
modity is brought to the ports and sold there, insurance will be 
furnished attaching at the port. Thus it will be found that in. 
the raw cotton business of our own country the marine under- 
writer fiu'nishes protection from the moment the cotton is ginned 
and weighed, whereas in the exporting of grain the marine under- 
writer assumes no risk until the grain is actually waterborne. 
Each particular trade has its pecuhar customs and the marine 
underwriter conforms to them so far as prudent underwriting wiU 
permit. An underwriter is presumed to know the ordinary cus- 
toms of trade or if he does not is at least put on inquiry as to 
what these customs are. 



CABGO INSURANCE AS AN UNDERWRITING PROBLEM 189 

Methods of Shipment Controlled by Physical Environment. — 

The customs of trade are in part controlled by the physical 
environment. Therefore the methods of shipment at deep water 
ports which are fed by a fertile and well-developed hinterland 
will be entirely different from those at shallow and unprotected 
ports where access to the interior is difficult or where the back 
country is not fertile or is a desert. Thus we find that at the 
North Atlantic ports of the United States raw commodities are 
partially processed before export, iron for instance not being 
shipped as ore, but after being partially refined and converted 
into pigs. This is true of most of the products of the mines. 
The products of the forests are converted into commercial lumber 
before being shipped. The products of the farm are in some in- 
stances shipped in their natural condition as in the case of grains, 
while perishable commodities are processed in order to preserve 
them and insure safe carriage. The country back of these ports 
is well wooded making possible the shipping of manufactured 
goods in substantial packages, and the means of transportation 
to the ports is such that the commodities may be expected to 
arrive at the ports in good condition. 

Knowledge of Trade Customs Important. — On the other hand 
if we tmrn to the Pacific ports of South America we find an en- 
tirely different environment resulting in customs of trade that 
present a wholly new problem to the underwriter. Manufac- 
turing is not developed along this coast, with the result that we 
find the raw products of the mines shipped in the form of ore, 
shipments of copper ore and of nitrate constituting a considerable 
part of the export trade. These commodities are brought from 
the mines to the shore, where they are taken by lighters to the 
steamers, which on account of the conformation of the coastline 
are compelled to lie in open or partially sheltered roadsteads to 
receive their cargoes. Imports are handled in much the same 
way, being exposed to risks pecuUar to the locality. The route 
into the interior is in many cases extremely hazardous involving 
as it does carriage by rail, by water, by wagon or by mule. Often 
property is transhipped or transferred from one mode of con- 
veyance to another several times, before the final destination 
is reached. Conditions are, of course, improving in these newer 
and less-developed parts of the world and the underwriter must 

14 



190 MARINE INSURANCE 

keep himself fully informed of progress made or of hazards in- 
creased through some local disturbance or through the neglect 
of some decadent government. 

Racial Characteristics Affect Marine Insurance. — In every 
country the natural environment and the pecuUar national char- 
acteristics of the people have developed customs that show their 
influence on the commercial activities of the people and on their 
modes of conductmg their business enterprises. Marine insur- 
ance is in no sense provincial. It is as cosmopoHtan as any 
business can be, and as has already been indicated is essential to 
the life and growth of the race. But this very fact makes neces- 
sary on the part of the underwriter a knowledge of these racial 
characteristics and customs. An underwriter can if he will, 
limit his business to routes of trade between the highly civil- 
ized nations, but if he is to fulfil his true mission he must be con- 
tent to assume risks in all trades, making his rates in harmony 
with the degree of hazard which each particular trade involves. 
Some races are noted for their low commercial ethics and the 
moral hazard in such trade is naturally great. Other races have 
a high sense of commercial honor and integrity and trading with 
these races involves merely a consideration of the physical 
hazards involved. It is in this respect that imderwriter organi- 
zations have done much to raise the standard of commer- 
cial ethics. Their representatives in foreign ports have insisted 
on a degree of honesty in connection with transactions involving 
damaged property, which has presented to the native peoples 
an entirely new standard of business ethics. Even today some 
nations have not progressed much beyond the original theory 
that might makes right and that possession is better evidence of 
ownership than is any legal title to property. 

Sale of Goods at Port of Refuge. — ^Among some races and in 
some ports there is found a sense of clannishness and a desire to 
band together to outwit and despoil the foreigner, which has no 
little bearing on the fortunes of marine underwriters. Casual- 
ties happen in all places and the master of a vessel in distress can- 
not always choose his port of refuge. It will, therefore, happen 
in many cases where goods arrive at a port of refuge in such con- 
dition that they must be sold to prevent their total destruction, 
that the local merchants will come to an understanding one with 



CABGO INSURANCE AS AN UNDERWRITING PROBLEM 191 

another that when the goods are oflFered for sale in the open 
market or at auction there will be no competitive bidding, or 
bidding of the most perfimctory sort only,. so that the goods will 
have to be sacrificed. After this worthy end has been attained 
distribution of the goods will be made among the merchants and 
another commercial victory over the foreigner will be recorded. 
These conditions cannot be avoided and the rates over such com- 
mercial routes will naturally reflect the increased hazards involved. 
Effect of Vessel Types on Cargo Instirance. — ^The problem of 
cargo insurance is one involving not only the character. of the 
goods themselves and the routes of trade, but, Uke all other 
maritime ventures, is also vitally concerned with the carrying 
vessel. From the earliest days of overseas commerce ships have 
been designed primarily as cargo carriers, and the story of the 
evolution of the modern steamer is largely the story of progress m 
designing ocean carriers which would cheaply and safely transport 
cargo. To this end various types of vessels have been designed, 
each type endeavoring to meet in a special way some particular 
or general need which has developed in overseas commerce. 
Thus there are single, double and multiple deck vessels, bulk 
carriers, tank vessels, refrigerator steamers and many other 
types having special merits in connection with* special trades. 
However, it is not always possible to find employment for vessels 
in the particular trade for which they are best adapted and 
vessels may seek and find employment in trades to which they are 
not altogether suited. Herein Ues the underwriter's chief 
problem with respect to the type of vessel. Perishable cargoes 
which can conveniently be carried in a double or multiple deck 
vessel, because this type provides safe storage without undue 
crushing, are sometimes of necessity laden in deep single deck 
vessels, where the packages are subject to the severe crushing 
force of the cargo piled upon them resulting, in the event of the 
stress of weather, in heavy damage claims. Then again vessels 
used in heavy cargo trades, such as the carrjdng of coal and ore, 
and not fitted for the transportation of perishable goods are some- 
times used in such trade with resultant damage to the cargo. 
The past four years have witnessed the employment in various 
trades of vessels poorly suited for the needs of such employment 
with consequent damage to cargoes. 



192 MARINE INSURANCE 

Vessel Speed an Element in Cargo Insurance. — ^The under- 
writer of cargo insurance is concerned not only with the vessel as 
a cargo carrier and its particular fitness for the carriage of the 
particular kind of goods under consideration, but also in the 
speed, size and general structural condition of the vessel. As a 
rule rates of premium in any particular class of business are 
predicated on vessels known as liners which have been specially 
designed and equipped for trade over the particular route in 
question. These vessels have considerable speed, are of a design 
suited .to the needs of the particular trade and of a size proper for 
the safe navigation of the harbors to be visited on the route in 
question. Any departure from this standard presents a risk 
varying from the basis upon which the minimum rate has been 
predicated. A vessel of slower speed will involve a longer 
exposure to the hazards of the sea. One of different internal con- 
struction may expose the cargo to unforeseen perils, while a vessel 
larger in size than the ports of call will readily accommodate, 
involves possible strandings or unusual Ughterage risks. 

Structural Design in Its Relation to Cargo. — The structural 
design of a vessel has a material bearing upon the degree of hazard 
involved in an insurance of the cargo. In the event of a strand- 
ing, a double bottom vessel is less apt to damage cargo. A 
vessel equipped with several watertight bulkheads is a better 
cargo risk than one without bulkheads not only in the event of 
collision but also in case the vessel takes fire. Steamers of the 
well deck design have a tendency to damage cargoes through 
leakage owing to the great weight of water which in rough seas 
may fall with crushing force in the well of the deck, sometimes 
forcing water through the hatches or through the openings in the 
surrounding deck erections. Furthermore, unless this type of 
vessel is designed to quickly discharge the water, the stability 
of the vessel may be seriously affected, especially if it be heavily 
loaded. A twin screw steamer also has manifest advantages over 
the single screw type. 

Natural Forces as Related to Cargo Insurance. — ^Reference has 
already been made in some detail to the natural forces in and 
about the ocean and of the physical topography not only of the 
ocean bed but of the continental shores and of the harbors. 
This theoretical knowledge must be applied practically in the 



CABGO INSURANCE AS AN UNDERWRITING PROBLEM 193 

consideration of individual risks. The underwriter must care- 
fully consider the route to be followed by the shipment for which 
insurance is desired. Questions relating to these physical condi- 
tions will naturally present themselyes to his mind. If the 
insurance offered relates to a voyage to or through the West 
India Islands the underwriter wiU consider the time of the year, 
as the hurricane season brings increased perils on this route. So 
the approach of winter on the Great Lakes or in the St. Lawrenee 
River will naturally call attention to the increased hazards 
which this period involves in Lake and St. Lawrence River trade. 
The ice floes of the North Atlantic in the Spring and early 
Summer will not be overlooked by the careful underwriter nor 
will he forget the long nights involving increased perils in the 
Baltic trade in the Winter months. The fact that the proposed 
voyage is through the inside passages to Alaska will recall to the 
underwriter's mind that this route is poorly charted and lighted 
and therefore extra hazardous, and he wiU not overlook the fact 
that at certain seasons of the year fog makes navigation danger- 
ous off the coast of Newfoundland and other similarly situated 
localities. 

Optional Routes. — The length of the route is also of importance 
to the cargo underwriter, the time involved, for instance, in going 
to Australia via the Panama Canal being less than when the 
Cape of Good Hope route is used. So the opening of new 
canals providing shorter routes may greatly affect the degree of 
hazard to which a risk may be exposed. However, it must be 
observed that a shorter route does not necessarily mean a safer 
route. For instance, some underwriters consider the trip from 
New York to Boston through the Cape Cod Canal a more dan- 
gerous route owing to the currents in the Canal than the longer 
route outside Cape Cod. The short route will. ordinarily be 
used if commercially it effects a saving in the cost of operating 
the carrying vessel, yet such decrease in the length of the voyage 
may materially increase the hazards from the imderwriting view- 
point. The distance travelled is relatively of small importance in 
the consideration of underwriting problems. 

Other Elements in Cargo Insurance. — The question of valua- 
tion must be given proper consideration and the amount of 
I liability which the underwriter is willing to assume on the par- 



194 MARINE INSURANCE 

ticular risk will be determined by the sum which he desires to 
retain and the amoimt which he knows or has reason to expect 
he can reinsure on equal or better terms. The question of the 
assured himself, whether principal or agent, and the general 
character and reputation of the various persons involved in the 
proposed venture will all be given their due weight in the con- 
sideration of each individual risk. While to the experienced 
underwriter the consideration of all these questions to which 
reference has been made and of many others of perhaps equal 
importance, becomes a matter of intuition or habit, the enumera- 
tion of some of these questions and the problems involved in 
them will give to the student of marine insurance some conception 
of the fund of information and the keenness of judgment with 
which a competent underwriter must be endowed. 

Average Conditions. — Up to this point no reference has been 
made to one of the most vital elements in the discussion of cargo 
insurance. This is the question of average conditions. In 
considering the policy form it was observed that the blank 
provided for a payment of loss, only if it amounted to five per- 
cent, while in the memorandum clause further restrictions were 
added relative to the percentage of loss for which the imder- 
writer would respond. In determining the rate of premium to be 
charged much depends on the degree of average which the under- 
writer is asked to assume or is willing to accept. Herein knowl- 
edge of the inherent qualities of each individual commodity is 
all important. The memorandum clause does not attempt to 
enumerate all articles and the restrictions regarding average 
therein set forth with respect to many commodities, is unduly 
burdensome to the assured. To make conmiodities free of 
average unless general, or in other words to insxire only against 
total losses and general average claims, ignores completely the 
many partial losses, the direct result of the major sea casualties, 
i.e., stranding, sinking, burning and coUision. 

Free of Particular Average. — It is therefore but natural that 
while the imderwriter is unwilling to assume liabiUty for ordinary 
partial losses due to the peculiar qualities of the particular 
article or to its form of package, he is content to bear partial 
losses, the direct result of stranding, sinking, burning or collision. 
Accordingly the so-called F.P.A. (Free of particular average) 



CABGO INSURANCE AS AN UNDERWRITING PROBLEM 195 

clause is adopted and this in its various forms is now the most 
used clause in the entire field of marine imderwriting. Basically 
it has two forms: one, known as the "F.P. A.E.C., " or Free of 
Particular Average English Conditions clause, the other the 
" F.P.A.A.C." or Free of Particular Average American Conditions 
clause. These two forms being somewhat different in their 
appUcation, a word of explanation will be proper in order to 
point out the distinction between them. 

American and English Average Clauses Contrasted. — The 
American form of clause conmionly used reads: "Free of 
particular average unless caused by stranding, sinking, burning 
or collision with another vessel. " The underwriter thus stipu- 
lates that he assumes no responsibility for partial loss, imless 
such partial loss is proximately caused by one of the enumerated 
casualties. On the other hand, the English form of the clause 
in its simplest form reads: "Free of particular average unless 
the vessel or craft be stranded, sunk, burnt or in collision.'* 
Thus as in the American form, the underwriter stipulates that 
he shall be free from liabiHty from partial loss in the ordinary 
case, but he agrees that the mere happening of one of the enumer- 
ated perils will nullify the average agreement, the poUcy then 
and thereafter being subject to the printed form with its specified 
average conditions. Thus, the underwriter under the F.P.A.E.C. 
clause assumes UabiUty m accordance with the terms and con- 
ditions of the poHcy for any partial loss that may appear after the 
happening of one of the enimierated casualties, whether or not 
such partial loss is the result, directly or indirectly, of such 
casualty. The mere technical happening of the casualty has 
divested the underwriter of all the protection which the clause 
afforded. 

The Effect of the F.P.A.E.C. Clause. — It is unfortunate that 
the English conditions clause should have received the interpre- 
tation which the courts have given it, as it doubtless was origi- 
nally intended that the meaning should be what the American 
clause clearly stipulates, namely, that the resultant partial loss 
must be the proximate result of the named casualty. The 
dominating position occupied by the English marine insurance 
market heretofore, has resulted in the English conditions clause 
being generally used in the American market to the practical ex- 



196 MARINE INSURANCE 

elusion of the simpler and more logical American form. The 
English clause introduces an element of speculation into marine 
insurance which will be shown by the following illustration. A 
vessel containing a cargo of general merchandise insured on 
F.P.A.E.C. terms from New York to Sydney, Australia, in going 
out of the port of New York strands on the channel bank, remains 
fast for a few minutes or a few hours as the case may be, but with 
the rising tide floats free, and absolutely uninjured proceeds on her 
journey. The cargo has not been disturbed or injured in any 
respect, yet because the vessel was stranded, the exception 
provided in the F.P.A.E.C. clause has been fulfilled and the 
goods are thereafter insured subject to the printed form of poUcy. 
Later in the voyage, through stress of weather, the decks open 
and water is admitted to the hold damaging the cargo. Under 
the insurance on F.P.A.E.C. terms this loss, if amounting to the 
percentage required by the printed form, will be recoverable, 
although the loss resulting from the leakage through the decks 
was not caused by either stranding, sinking, burning or collision. 
Under the American form the underwriter would not be liable 
for this loss. It will thus be seen that it is quite possible for a 
cargo owner who owns or controls the vessel to obtain "subject 
to average" insurance at ''free of average'' rates, by ins\u*ing on 
F.P.A.E.C. terms, and then through .collusion with the master 
arrange for a technical happening of one of the excepted casual- 
ties so that the poUcy thereafter will be subject to average. 

F.P.A,B.C. Clause Illogical. — A more pronounced illusti-ation 
of the illogical working of the F.P.A.E.C. clause will appear from 
the following example. A vessel fully loaded with a cargo in- 
sured on F.P.A.E.C. terms, during the course of her voyage meets 
with heavy weather, her seams open, considerable water is 
shipped and the cargo is damaged approximately ninety per- 
cent. The vessel, however, makes her port of destination and the 
owners of the cargo face a heavy loss which because of the 
F.P.A.E.C. conditions cannot be recovered from the underwriters, 
none of the excepted casualties having occurred. However, 
when approaching her berth the vessel is run into by another 
vessel but does not suffer much damage through the collision. 
Nevertheless, the collision voids the average warranty and the 
cargo insurance automatically becomes subject to average, and 



CABGO INSURANCE AS AN UNDERWRITING PROBLEM 197 

the underwriters become liable for the particular average loss 
which had previously occurred through the leaking of the vessel. 
Amended F,P.A.E.C. Forms. — These two cases will demon- 
strate that the use of the F.P.A.E.C. clause introduces an element 
of speculation into marine insm*ance transactions. In order to 
avoid the consequences of the legal interpretation which was 
given to this clause, amendments have been made from time to 
time in its wording in order to lessen the possibility of claims 
being made which are not proximately caused by casualty, and to 
provide for the payment of losses, which, while fortuitous in 
their nature and not in any way caused by the inherent qualities 
of the articles themselves, would not be recoverable under the 
original F.P.A.E.C. form. In the last revision of the Institute 
(London) Cargo Clauses (F.P.A.) 1917 in paragraph number 8 
we find the F.P.A. clause expressed in the following words, viz. : 

" Warranted free from particular average unless the vessel or craft bfe 
stranded, sunk, or burnt, but the Assurers are to pay the insured value 
of any package or packages which may be totally lost in loading, tran- 
shipment or discharge, also any loss of or damage to the interest insured 
which may reasonably be attributed to fire, coUision or contact of the 
vessel and/or craft, and/or conveyance with any external substance 
(ice included) other than water, or to discharge of cargo at a port 
of distress, also to pay landing, warehousing, forwarding and special 
charges if incurred." 

Stranding and Sinking. — Many cases have come into the 
courts for the interpretation of the meaning of the words 
"stranded, simk or burnt" as used in the F.P.A. clause, in 
order to determine the degree of casualty necessary to nullify 
the free of average warranty. The consensus of these deci- 
sions seems to be that to constitute a stranding there must be 
such a taking of the bottom as results in the complete stoppage 
of the movement of the vessel, and not merely what is known as 
"touch-and-go," where the vessel comes in contact with the 
bottom but does not actually lose her momentmn, merely sliding 
oflf the obstruction and proceeding on her course. So a sinking 
must be an actual immersion of the vessel in the water, although 
it is not necessary that the vessel sink to a point where it is 
completely submerged or where it rests on the ocean bed. 
For example, a vessel laden with lumber will sink, but will not go 



198 MARINE INSURANCE 

to the bottom, remaining partially immersed and partly out of 
the water because of being in a water-logged condition. Such 
partial immersion, however, is a sinking. 

Burning and Collision. — Burning has also been a mooted ques- 
tion and it has been decided that in order to have such a burning 
as will void the free of average warranty there must be an actual 
destruction of a portion of the ship. It may happen that a severe 
fire occurs in the cargo without doing any material damage to the 
ship itself, so that a strict construction of the word burnt would 
prevent the recovery of the loss on cargo. To avoid this possi- 
bility it will be noticed that the F.P.A. (1917) clause quoted 
above provides that loss of or damage to the interest insured 
reasonably attributable to fire is recoverable. It will also be 
observed that collision is omitted in this form from the list of 
excepted casualties. Collisions often result in little or no damage 
tj) the ship or cargo, but as already pointed out a harmless 
collision might imder the original F.P.A.E.C. form admit 
claim for. prior or subsequent damage in no way attributable to 
the collision. On the other hand the omission of this casualty 
altogether, might work injustice, in that a coUision while of Uttle 
consequence to the ship itself might, through the admission of 
some water, result in serious damage to the cargo. Underwriters 
have, therefore, assumed liabiUty for any loss or damage which 
may be reasonably attributed to collision or to contact of the 
vessel with any external substance (ice included), other than 
water; the exception in regard to water being made because a 
vessel normally is always in contact with water. 

Other Casualties. — Furthermore, packages are often lost in 
loading, transhipment or discharge, and this risk is also covered, 
notwithstanding the free of average warranty. Liability is also 
admitted for expenses which may be incurred after the abandon- 
ment of the voyage, by the discharge of the cargo at a port 
of distress, or other charges which may result from the landing, 
warehousing and forwarding of the cargo as the result of con- 
ditions which make it impossible for the vessel to fulfill her 
contract of carriage and yet have not resulted through any of 
the excepted casualties. 

Duration of Risk. — In determining the rate of premium to 
be charged in cargo insurance it is also important to consider 



CABGO INSURANCE AS AN UNDERWRITING PROBLEM 199 

how great is the risk to be run not only from the geographical 
point of view but also from a consideration of the length of time 
during which the commodity will be at the risk of the under- 
writer. This naturally leads to a further consideration of the 
warehouse to warehouse clause which is one cf the most used 
clauses in cargo underwriting. This clause in the form most 
commonly used, that of the London Institute, reads: 

"Including (subject to the terms of the policy) all risks covered by 
this policy from shippers' or manufacturers' warehouse until on board 
the vessel, during transhipment if any, and from the vessel whilst on 
quays, wharves or in sheds during the ordmary course of transit until 
safely deposited in consignees' or other warehouse at destination named 
in policy." 

This clause while providing a broad form of protection covers 
property only while out of the custody of the owner, during 
transit in the ordinary course from warehouse to warehouse. 
In the ordinary conditions of overseas commerce this form of 
protection is usually sufficient for the assm-ed. With the con- 
gestion which war occasions at practically all ports, however, 
the imusual delay to which shipments are subjected raises the 
question of what "ordinary course of transit" as used in the 
warehouse clause means. It seems clear that these words must 
be interpreted in the light of existing conditions, "ordinary 
course of transit" dm-ing a state of war having a totally different 
meaning from what it has under normal conditions. On the 
other hand it cannot be presumed that if shipments are left on the 
wharf week after week while steamers sail for the port of destina- 
tion of the goods, that the goods are still in ordinary course of 
transit, notwithstanding the fact that the unusual delay occa- 
sioned is without the knowledge or consent of the owners of 
the goods. 

Rate of Premium Based on Ordinary Transit. — The under- 
writer in fixing the rate of premium is presumed to have made 
the charge adequate to cover usual delay imder existing con- 
ditions, but should not and will not be held to have provided 
protection if the usual delay is converted into unusual detention. 
Banks and shippers may require additional protection to provide 
for the contingency of unusual delay and various clauses are 



200 MARINE INSURANCE 

devised extending the warehouse to warehouse clause, to cover 
such a contingency. The great difficulty from the viewpoint 
of the underwriter, is to establish some basis for determining the 
premium to be charged, which will be adequate to compensate 
him for the increased hazard assiuned and yet will not involve 
a system for calculating the time of detention so expensive in 
operation as to cost more than the additional premium charged. 
Cargo Clauses are Numberless. — The clauses used in connec- 
tion with cargo insurance are numberless, referring as they do to 
every possible phase of the cargo underwriting problem. A few, 
however, such as the warehouse to warehouse clause, the craft 
clause providing for Ughterage risks from the shore to the vessel 
and from the vessel to the shore and the deviation clause to which 
reference was made in an earlier chapter are common to most 
cargo insurances. Other clauses have been devised primarily 
for special trades or for use in relation to certain ocean routes. 
A few of these clauses will be considered in the following chapter 
in connection with tlie discussion of insurance on specific 
commodities. 



CHAPTER 12 
SPECIFIC CARGO RISKS 

Full Cargo Business. — To enumerate and classify, from an 
underwriting standpoint, all the conunodities which are the sub- 
ject of cargo insurance would be a well-nigh endless task and 
one far beyond the scope of this treatise. It is possible, however, 
to indicate several broad headings under which commodities 
may be grouped and to give a brief description of the forms of 
insurance granted on some of the principal commodities in each 
group. Before doing this, however, it will be well to give some 
consideration to the peculiar hazards in connection with full 
cargo business. A full cargo may consist of any kind of goods, 
although it is more usual to find vessels so loaded with raw or 
bulk commodities. 

A Seasonal Business — Congestion Hazard. — ^As a rule, full 
cargo business is seasonal and is confined at any given season 
to relatively few ports. For instance in the movement of the 
United States cotton crop, the Southern ports of the coimtry 
are involved principally during the latter part of eacli year. 
The business centering in a few ports near the cotton producing 
areas, leads to congestion and the wharves and the streets in 
the neighborhood of the wharfs become filled with cotton, 
inadequately protected from the elements and subject to con- 
flagration hazard. Such congestion, while not pecuUar to the 
cotton business, becomes more important in the movement of this 
crop, because it is customary for the marine imderwriter to 
assume the interior fire and transit risks in the insurance of 
raw cotton. Similar congested conditions will be foimd in the 
movement of raw sugar, cofifee, grain, hemp and bm'laps, but the 
congestion risks in these trades is apt to result in losses largely 
due to hasty and careless handling which causes damage to the 
commodity itself. Thus vessels may load in the rain causing 
to a perishable cargo damage for which an underwriter will 
have difficulty denying liabiUty if the insurance is subject to 
average. An underwriter ordinarily is not liable for fresh water 

201 



202 MARINE INSURANCE 

damage, but it is not always possible to prove that damage 
fomid on goods is due to fresh and not to sea water. 

Overloading of Vessels. — In these seasonal trades there is 
usually a scarcity of tonnage with the inevitable result that there 
is a tendency to overload vessels, unless careful inspection is 
maintained by underwriters. The question of loading, therefore, 
assumes great importance and underwriters' boards have laid 
down rules in certain cases prescribing approved methods 
of stowage, to which vessels must conform in order to obtain 
insurance. This is peculiarly true in the grain business. This 
commodity, because of its tendency to shift, becomes an extra 
hazardous risk unless proper stowage is obtained. In the case 
of lighter cargoes where it is impossible to overload a vessel with 
the commodity itself, a condition of instability may result owing 
to the vessel being top heavy. It is, therefore, usual to carry 
in the bottom of the holds of such vessels, ore or metals or other 
heavy materials in order to lower the center of gravity and thus 
increase the meta-center height. There is also the tendency 
to carry on such vessels, heavy deck loads of timber, or it may 
be high deck loads of the commodity itself, this condition being 
especially true in the raw cotton trade. These deck cargoes are 
often poorly stowed, or improperly secured, proving a menace 
to the under deck cargo because of the fact that part of the deck 
load may be lost, causing the vessel to get out of trim. Such 
cargoes greatly increase the fire hazard, owing to the difficulty 
of gaining access to the under deck cargo. 

Unfit Vessels Used to Carry Full Cargoes. — The scarcity of 
tonnage in these seasonal trades also calls into service many 
vessels not fitted for the cargoes to be carried. We thus find 
that in the raw sugar trade from Cuba to the United States and in 
the export grain trade, vessels physically unfit for carrying these 
exceedingly perishable commodities are offered for charter. 
Such vessels, either because of their design or because of their 
age and physical condition are not fit to withstand the hazards 
of the trade. The result is that often such vessels, encoun- 
tering heavy weather will leak, causing enormous damage to 
perishable cargoes. The effect of water on these perishable bulk 
cargoes, whether it obtains entrance because of the weakness of 
the ship, or through a casualty, is very great. These cargoes, 



SPECIFIC CARGO RISKS 203 

consisting as they usually do of vegetable products, may, as in 
the case of sugar, rapidly dissolve, or as in the case of grain swell 
and tend to burst the ship, thus causing further damage and 
perhaps the loss of the whole ventiu'e. Sometimes the tendency 
is to quickly soften and rot and become unsalable, as is the case 
with flaxseed and beans and many of the vegetable fibers. 

Fire Hazard. — The fire hazard is of no little importance in the 
full cargo business, especially in connection with commodities 
which are apt to heat. Proper ventilation is, therefore, of the 
utmost importance in these trades. Soft coal when carried on 
long voyages is very apt to take fire unless the holds can be cooled 
during the voyage. This can most easily be done by removing 
the hatches during fine weather. However, if the cargo is 
already on fire and smoldering, the admission of fresh air with 
the opening of the hatches will probably result in the cargo 
bursting into flames. In the case of vegetable fibers, which ordi- 
narily are carried long distances through the torrid zones, the 
danger of fire from improperly cured fiber is very great. The 
fire hazard is also serious in the case of cotton. If cotton is 
shipped wet it may heat in the hold and spontaneous combustion 
result, but more often cotton fires, which are very common on 
shipboard, are due to sparks lodging in the bales during loading, 
caused it may be by stevedores smoking or by the hitting of the 
metal straps of the bales on the steel hatch combings dming the 
stowage of the cotton. There being much air in a cotton bale 
the spark will live for many days, gradually eating its way into 
the bale and eventually causing the bale to take fire, it may be 
after the vessel is many days on her voyage. 

Classes of Cargo. — Cargo insiu'ance may be broadly divided 
into classes, each class containing those commodities which have 
a common point of origin. Thus we may group together the 
products of agriculture, of animals, of forests, of mines, or of 
manufactures. It does not follow, however, that because two 
commodities fall into the same class the risk on each is the same 
from an underwriting standpoint. It will be of interest to briefly 
consider some of the commodities in each group. 

Products of Agriculture. — The products of agriculture, both 
in bulk and in value, form one of the largest classes of cargo risks. 
This is true in large part because the raw commodity is grown 



204 MARINE INSURANCE 

principally in countries or in sections of a country which are not 
given to manufacturing. The raw product must be transported 
from the place of origin to the place of manufacture or consump- 
tion. This fact, coupled with the nature of the commodity itself 
determines in large measure the conditions under which insurance 
protection is afforded. 

Sweat Damage. Skimmings Clause. — Cocoa and coffee 
beans constitute a considerable portion of the exports of some 
tropical regions. Both commodities are easily damaged and by 
preference are insured by underwriters on free of particular aver- 
age terms. However, their susceptibility to damage through no 
fault of packing, but because of their transfer by water from a 
warm to a cool climate, has led to the granting of insurance 
against what is known as sweat damage. There is always a 
certain amount of moisture in the hold of a vessel. The vessel 
loads her cargo of cocoa or coffee in bags at a tropical port, closes 
her hatches and proceeds on the voyage. As the cooler waters 
of the temperate zone are reached the sides of the ship cool 
causing condensation of the moisture in the hold and, if the cargo 
is not properly dunnaged and protected, water will reach it caus- 
ing sweat damage, which, under extreme conditions, may affect 
a considerable portion of the cargo. It is also usual to insure 
cocoa and coffee under what is called the ''Skimmings clause." 
In this clause the underwriter assumes liabihty for all partial 
loss through the bags being wet or stained by salt water, the 
coffee or cocoa affected being skimmed off and the damage 
assessed on the portion so segregated. 

Raw Cotton. — Reference has already been made to raw cotton. 
This commodity is grown in our own Southern States, in China, 
Egypt, India, Peru and in Umited quantities in some other parts 
of the world. The fiber is baled, but the condition of the bale 
varies in different countries, the wrapping of the American cotton 
bale being but another example of inexcusable waste on the part 
of the American people. So poorly is American cotton baled 
that the delicate staple is not sufficiently protected from the 
elements and from the soil and stain which inevitably accumulates 
during the handling and transit of the conmiodity. The result 
is that the bales arrive abroad badly damaged through these 
causes and the consignees claim allowance for the damaged 



SPECIFIC CARGO RISKS 205 

staple. Unfortunately underwriters have assumed liability for 
this damage, called country damage, with the result that there 
has not been the same incentive to better bale protection and 
more careful handling that there would have been had the loss 
fallen on the shippers or consignees. Furthermore, in some Em-o- 
pean cities quite a thriving business has developed in the adjust- 
ment of country damage claims and in the reconditioning of the 
bales, so that no great degree of pressure has been exerted on the 
shippers to provide a better package. At the opening of a new 
world era, when conservation is the ringing cry in every line of 
endeavor it would seem that efforts could successfully be made 
to end an abuse which is a reflection on the business methods of 
the American people. It is true that a measure of progress has 
been made in the better compression of the cotton under the 
Webb system, but much remains to be done before a package is 
produced that can compare favorably with the Egyptian cotton 
bale. Underwriters have also endeavored to remedy this con- 
dition by agreeing to return part of the premium charged for 
covering country damage if the claims for this character of loss 
should be reduced below a certain percentage of the premium 
charged. This effort has not been without success as many 
merchants have been induced, through the saving in premium 
effected, to use greater care in the protection of the bales. 

Schedule Rating. — The insurance of cotton is peculiar not only 
in that country damage losses are covered, but also in that 
the insurance covers the ginned cotton from the time it is weighed 
at the towns adjacent to the farms where the staple is grown. 
The insurance protection continues from this point until the 
cotton is delivered at the warehouse or mill of the consignee in 
Europe, China, Japan, India, or wherever the raw product is 
manufactured into cloth or other cotton products. The insured 
cotton is not in continuous transit. It is carried from places of 
purchase to concentration points where the bale is recompressed 
and reconditioned and the cotton is sorted into the various 
grades and made into lots to fill the requirements of sales made 
by the owners. Schedule rating so common in fire insurance 
and so unusual in marine insurance finds its nearest approach 
in the rate tariffs in use in the raw cotton trade. The various 
factors of fire risk in different locations, flood risk, transit 

15 



206 MARINE INSURANCE 

risk by rail, by steamer and by lighter, also country damage 
risk and special port risks are all factors in determining the rate 
charged. 

Grain Cargoes. — The insurance of grain cargoes presents one 
of the most interesting and most hazardous classes of risks in 
connection with cargo underwriting. Grain being small in size 
and of smooth skin, has a tendency to flow and no little difficulty 
is experienced in stowing such cargoes so that the vessel will be 
stable when it sails and continue in that condition regardless of 
the weather encountered at sea. Various sets of rules have been 
formulated by government boards and by underwriters' boards, 
all having as their aim the fitting of vessels internally so that 
grain cargoes cannot shift. In general these rules provide for 
shifting boards, a temporary longitudinal bulkhead so fitted as to 
divide each hold into two smaller holds. The grain is fed into 
the holds, properly spread, and boards are laid upon the grain 
and on top of these are placed several tiers of grain in bags to 
prevent the movement of the cargo. In the case of double-deck 
vessels wing feeders are often required, these feeders being bins 
of considerable size, which with the roUing of the vessel and the 
possible movement of the cargo, feed down into the hold 
grain which will take the place of that shifted and restore the 
vessel to a condition of stability. Other rules are made respect- 
ing the loading of the old style self-trimming vessels, the turret 
and the trunk deck types. A perusal of these rules will throw 
much light on the difficulties encountered in the proper stowage 
of bulk grain cargoes. 

Standard Clauses. — Grain, being a very perishable conmiodity, 
is usually insured on free of average terms. When shipped in 
bags and thus in a measiu'e protected it may be insured subject 
to average. The subject of grain insurance in the export trade 
is so important that the London and American Institutes acting 
in conjimction with the London Corn Trade Association 
have promulgated standard clauses under which export grain, 
from the United States to the United Kingdom and the Conti- 
nent of Europe, is insured. The principal part of this clause 
relates to the subject of average, the protection afforded by the 
original free of particular average English conditions clause 
having been greatly broadened. 



SPECIFIC CARGO RISKS 207 

Hard and Soft Grains. — It is important to notice thiat from the 
underwriting viewpoint some grains are more hazardous than 
others. The harder cereals, such as wheat and rye, are much 
better risks than are corn and flaxseed, which because of their 
softness will, in the event of damage, rapidly spoil and become 
worthless. It is, in fact, exceedingly difficult to ship com at cer- 
tain seasons of the year without the cargo arriving at desti- 
nation in a very deteriorated condition. While it is true that 
grain is insured on free of average terms, it is equally true that if 
one of the excepted casualties occurs and the underwriter becomes 
liable for average he is then affected by all the inherent qualities 
of the commodity. It also happens in the case of some grains, 
such as flaxseed, for which there is ordinarily a limited market, 
that a comparatively slight damage the outcome of a casualty, 
may result in considerable loss owing to the lack of a market 
for this particular grain at the port of refuge. It is often not 
possible to either recondition grain at a port of refuge or carry 
the cargo forward to destination in its damaged condition and 
a forced sale is necessary. 

Vegetable Fibers. — The fibrous conunodities, of which hemp, 
sisal and jute comprise the chief examples, are also exceedingly 
perishable in their nature and are usually insured free of average. 
In the jute trade special clauses have been promulgated by mu- 
tual agreement between the merchants and the underwriters. 
Fire is one of the chief hazards encountered in this trade, it often 
being of spontaneous origin. This fact is difficult to prove with 
the result that the loss usually falls on the underwriter. When 
jute takes fire, the blaze is exceedingly difficult to extinguish, as 
the fire smolders, and after it is apparently out, the jute will 
again burst into flame. 

Raw Sugar. — Raw sugar is also a very perishable cargo but the 
principal cause of loss with this commodity is water. Being 
very soluble the admission of water to the hold will quickly re- 
sult in serious damage. Sugar is usually insmred subject to 
average, the minimum average payable depending in large 
measure on the length of risk. In the Cuban-American sugar 
trade the franchise is very low, the underwriter assiuning Uability 
for loss amounting to $100, whereas in the Java-American trade 
the underwriter may insist on a minimum average of $750. In 



208 MARINE INSURANCE 

the Cuban and Porto Rican sugar trades which are the most 
important in the American market, cargoes are insured subject 
to the Loss in Weight or the Loss in Test clause or both. Under 
the Loss in Weight clause the underwriter adjusts the loss con- 
sidering merely the actual reduction in weight as shown by the 
invoice weights and the outturn weights, an allowance of two per- 
cent being made for the absorption of moisture. On the other 
hand in an adjustment under the Loss in Test clause the percent- 
age of damage suffered as shown by comparing the sound and 
damaged values, is applied to the insured value of the damaged 
sugar and thus the loss is determined. 

Fruits and Vegetables. — There are many other products of 
agriculture, such as fresh fruits and vegetables for instance, which 
are a considerable item in marine insurance. These commodities 
are usually of so perishable a natm'e that they are insured free 
of particular average absolutely, although when shipped in re- 
frigerated compartments it is usual to cover partial loss in the 
event of the breakdown of the refrigerating apparatus, pro- 
viding such breakdown continues a certain number of days or 
hours. The transportation of apples from America to the United 
Kingdom is one phase of the fruit trade which involves enormous 
values when trans-Atlantic trade is normal. Likewise, the car 
riages of bananas, pineapples and other tropical fruits from the 
West Indies and Central America to United States ports is so 
important that lines of steamers especially designed for this trade 
are, during ordinary times, in constant operation between these 
ports. 

Products of Animals, — ^The insurance of animal products is an 
important feature of marine underwriting. With the discovery 
of improved methods for the curing and preserving of animal 
products and with the perfecting of refrigerating machinery 
which permits the carriage of fresh and frozen meats for thousands 
of miles in perfect condition, a new and important field for marine 
underwriting came into being. The insurance of the cured and 
preserved animal products is not an extra hazardous class of risk, 
as the commodity is usually well packed and not easily dam- 
aged and is accordingly insured on very favorable terms. In fact 
packing-house products, excluding fresh and frozen meats and 
the by-products of the packing plants, are usually insured subject 



SPECIFIC CARGO RISKS 209 

to three percent average on each package. Some of the anunal 
oils and greases which under moderate heat turn into oil are 
very hazardous, if the risk of leakage is covered. The degree 
of risk involved in leakage insurance is dependent largely on the 
season of the year and the normal temperature of the route 
over which the cargo will pass and of the port of destination. 
The more heat to which these oils and greases are subjected the 
more fluid they become and the greater the likelihood of leakage 
resulting. 

Canned and Bottled Goods. Dairy Products. — Canned and 
bottled goods whether vegetable or animal products are ordi- 
narily insm-ed free of average, partially because of the effect of 
moisture on the tin container and partially because of the expense 
of reconditioning the container, whether tin or glass, in the event 
of damage. Relabeling is usually necessary even if the damage is 
slight, resulting in expense oftentimes out of all proportion to the 
actual damage suffered. Dairy products, particularly butter 
and cheese are also insured free of average because of their sus- 
ceptibility to damage and their tendency to spoil if sUghtly 
damaged, while eggs are usually insured free of claim for loss by 
breakage, and otherwise free of particular average. 

Refrigerated Goods. — Fresh and frozen meats when insured 
subject to average and subject to loss occasioned by the break- 
down of the refrigerating apparatus present one of the most 
hazardous risks in the whole reahn of cargo msurance. The 
industry is of the greatest importance, especially in connection 
with the importation of these products into the United Kingdom 
from the United States, South America, South Africa and Aus- 
tralia. When it is considered that a commodity that will 
quickly spoil has to be carried a distance of from three to ten 
thousand miles over routes that in many cases pass through 
the very hottest portions of the ocean, some conception will be 
gained of the hazards involved in this form of insurance. Not 
many years ago a fine refrigerator steamer loaded with a valuable 
cargo of fresh and frozen meats took fire while on the way from 
Australia to the United Kingdom and was compelled to enter 
Dakar, West Africa, a port very nearly on the equator. The fire 
was extinguished but the refrigerating apparatus in one hold 
containing frozen mutton was so damaged that it was useless. 



210 MARINE INSURANCE 

The mutton in this hold quickly spoiled and had to be jettisoned 
resulting in a very serious loss to the underwriters. 

Dressed Meats. — ^Dressed meats are usually shipped either 
chilled or frozen. Chilled meat is kept at a temperature approxi- 
mating 40°, cool enough to prevent decomposition and yet not 
cold enough to freeze the meat. Frozen meat on the other hand 
is frozen solid before shipment and is kept at a temperature of 
about 28°. In the event of breakdown of the refrigerating plant 
the spoilage in the case of frozen meat is much more rapid than it 
is with chilled meat. Ordinarily beef is shipped chilled, while 
mutton, poultry, rabbits and the smaller pieces of meat are 
shipped frozen. The hazard of fresh and frozen meat insurance 
is further increased in many cases by the assumption of the risk 
from the moment the meat enters the cooUng or freezing chambers 
of the packing plant and continues during transportation and for 
a period not exceeding sixty days after arrival at destination. 
The risk prior to shipment on the ocean going steamer is also 
limited to sixty days. This is the broadest form of cover granted 
in this trade, though there are many lesser forms of insurance in 
use. In fact the London Institute has promulgated at least 
twenty different clauses relating to the insurance of fresh and 
frozen meats. The insurance of these commodities is practically 
controlled by the London market, as the United Kingdom and the 
Continental countries are more interested in this business, since 
the United States is self-supporting in the matter of meat supplies. 
Shortly before the cornmencement of the World War, however, 
efforts were made to import fresh and frozen meats from the 
Argentine and much of the insurance on these shipments was 
placed in the American market, though it was generally insured 
in accordance with the London Institute Clauses. 

Livestock. — The shipment of Kve stock is in normal times a 
subject of considerable importance in the insurance market. 
In this trade several kinds of insurance are afforded ranging from 
that which assumes liabiUty for only the absolute total loss of 
the vessel and her cargo including the livestock insured, to in- 
surance under full mortaUty conditions where the underwriter 
assumes KabiUty for the death of the animals, however caused, pro- 
vided they were shipped in sound and healthy condition. Such 
insurance may terminate on the deposit of the animals on shore, 



SPECIFIC CARGO RISKS 211 

no liability being assumed for any animal walking ashore re- 
gardless of its physical condition or the risk may continue for a 
fixed period, say five days after the animals are landed. During 
this period animals greatly affected by the sea voyage often die 
and the underwriter assumes liability for this loss. The degree 
of hazard in the insurance of livestock is dependent largely on the 
nature and temperament of the animals. Thus sheep are more 
susceptible to pneumonia than are cattle, this disease often being 
the cause of death during transit. Horses bemg more high spir- 
ited than cattle often become terrified in a storm, doing injury 
to themselves or to other animals. Mules on the other hand 
being phlegmatic in temperament and not readily susceptible 
to disease are in this very hazardous class comparatively a safe 
risk. 

Hides and Skins. — The shipment of hides and skins is a very 
important trade in the products of animals and is very hazardous 
in its nature. Hides and skins are usually shipped in a partially 
finished state, that is they are not processed to the point where 
they are ready for use in the industries. Ordinarily two methods 
of preparation are used in preparing the raw material for ship- 
ment. The hides and skins may be cured and dried, tied into 
bales or bundles and shipped, or they may be pickled and shipped 
in casks. Under either method an extra hazardous commodity 
is offered for insurance, for in the case of the wet salted skins if 
the brine runs off they will rapidly deteriorate, while if the dried 
hides are wet they will quickly rot. In the event of a casualty the 
loss is usually large and if the disaster happens far from a market 
or from a place where the commodity can be reconditioned, the 
danger of a total loss is great. Furs are also a hazardous cargo, 
but because of their greater value they are more carefully packed 
and are less apt to sustain damage. 

Raw Silk. — ^Before passing from the consideration of the 
products of animals mention may be made of raw silk, a com- 
modity because of its high value furnishing no Uttle volume of 
insurance. Its great value has, however, resulted in this com- 
modity being so finely packed and so carefully handled in ship- 
ment that it is one of the best risks in the whole field of marine 
underwriting. Although very susceptible to injury, it is so 
packed that it cannot be damaged readily, unless a serious 



212 MARINE INSURANCE 

casualty occurs. It is usually shipped in well prepared bales or 
may be imported in tin-lined cases and is usually carried on the 
very finest vessels operating from the silk ports. 

Products of the Forest — ^Among the products of the forest 
rubber and gum take a leading place. These commodities rank 
high as desirable subjects of insurance, being Uttle susceptible 
to damage. In the last ten years the growth in the shipment 
of crude rubber from the tropical coimtries to the manufacturing 
centers of the world has been Uttle short of marvelous. Im- 
proved methods of processing the crude rubber have permitted 
its use in many lines of industry and the supply is hardly equal 
to the demand. Other gums also form a considerable part 
of the commerce of certain ports. The shipment of rosin and 
turpentine is of no Uttle importance in the trade of certain of 
our own Southern ports. 

Wood Cargoes, — The insurance of the products of the forest 
in the form of logs, timber and Imnber usuaUy involves the 
subject of on deck cargoes. Ordinarily these cargoes are Ught 
and buoyant and in order to get the vessel in proper trim it is 
necessary to carry part of the cargo on deck. While the rough 
logs and large timbers are not very susceptible to damage, the 
sawed and finished lumber may be considerably lessened in value 
through stain or through damage in handling. So, too, in the 
matter of salvage, while most of these products wiU float and, 
therefore, cannot readily be lost, the expense of handling the 
smaller pieces of finished lumber often makes salvage operations 
impracticable. The fact that these cargoes are carried on deck, 
has an important bearing on the risk as a whole, as the shifting or 
loss of a part or the whole of the deck cargo may result in the 
loss of the entire venture. The shipment of the roots and bark of 
forest trees is also an important part of overseas commerce, these 
commodities being extensively used in the arts, in medicine 
and in industry, a considerable part of our dyestuflfs being pro- 
duced from forest products. 

Products of the Mines, — The products of mines afiford two of 
the extremes in the degree of risk which they offer to the under- 
writer. Metals such as copper and tin in pigs stand at the 
head of the list of commodities which offer little or no risk except 
that of total loss, while salt is about as poor a subject of insurance 



SPECIFIC CARGO RISKS 213 

as the whole field affords. Here again the nature of the com- 
modity is the important factor, soluble minerals being bad risks 
while the insoluble are in the very highest class. The demand for 
the precious and semi-precious metals in the arts and industries 
is very great. In the case of the baser metals such as tin, copper 
and iron which are produced in great abundance in certain 
countries, but are scarcely to be found in others, an enormous 
overseas trade has developed. These commodities are usually 
insured free of particular average. However, in the event of 
casualty occurring, unless it be a sinking to a depth where salvage 
operations are impracticable, the metals are practically unin- 
jured and the attendant loss is merely the salvage and recon- 
ditioning expenses. Under similar conditions the soluble min- 
erals such as salt and nitrates would probably become a total 
loss. 

Coal and Ore. — Coal is one of the most important and essen- 
tial commodities in overseas trade. Being a rough dirty cargo 
it is not shipped in the best vessels, except in cases where vessels 
are specially designed for this trade. For this reason the risk 
on coal is usually great. The commodity itself, however, is a 
satisfactory subject of insurance, especially the harder grades of 
coal. The softer coal such as the bituminous, the English and 
the Indian coal, when shipped on long voyages on poorly venti- 
lated ships, presents a dangerous fire hazard because of its tend- 
ency to heat. The shipment of bulk ores is in about the same 
class as coal. The greatest danger with all of these heavy car- 
goes is the possibility of the vessel being overloaded or improp- 
erly loaded thus affecting its stability. It requires no little 
degree of skill to so load these cargoes that they will not shift 
and that the vessel will not be unduly stiff. 

Products of Manufacturing. — The insurance of products of 
manufacturing affords the most diversified field in marine under- 
writing. Any individual consideration of these commodities 
is impracticable in this work, but the field embraces articles which 
present practically every problem with which marine under- 
writing is concerned. The business as a rule is general cargo 
business, that is, vessels carrying manufactured goods will be 
loaded with many different products, including articles little 
susceptible to damage and those that are extremely perishable. 



214 MARINE INSURANCE 

together with commodities presenting all the intermediate degrees 
of hazard. Here the trite saying that the marine underwriter 
must know "everything about something;" that is his own busi- 
ness, and "something about everything" has its most complete 
illustration, in that the underwriter is called upon to decide 
under what conditions he will insure any given commodity, 
and upon the correctness of his judgment depends the success 
of his underwriting. Truly in marine underwriting "a KMe 
knowledge is a dangerous thing." 

Diversity of Risk. — Mention may be made of a few manufac- 
tured articles merely to show the wide diversity of risk which 
this field offers. Cement has of late years become an important 
article of commerce. This risk is exceedingly hazardous owing 
to the fact that the addition of water turns the cement into stone, 
resulting in a total loss. Cases have occurred where cement be- 
coming wet in the hold of a vessel has turned into stone and the 
only way of removing the mass has been by dynamite. Wheat 
flour on the other hand which like cement is a fine powder and is 
usually shipped in bags is one of the best insurance risks, because 
of the fact that when wet the flour near the bag forms a paste 
which protects the rest of the contents. The chief danger 
with flour is its tendency to spoil or to become grubby, risks 
which the marine underwriter, of course, excludes. Otherwise, 
it is not unusual for the underwriter to assume "all risks" on 
flour. 

Machinery, — ^Machinery is an interesting subject of insurance 
because of the fact that in most cases the breakage or loss of one 
small part of a machine will render useless the whole. Accord- 
ingly underwriters have devised machinery clauses of various 
kinds, the underlying principle of all being that in the event of 
loss the underwriter merely assmnes Uability for the part lost 
or broken and for the expense attending its replacement. 

Burlaps and Bags, Fire Hazard. — ^Burlaps and bags also 
present peculiar hazards and are important because of the great 
quantities of these articles which are shipped. Fire is one of the 
great hazards in this trade, while the damage caused by water 
staining the bales is also one of considerable importance. The 
manufactures of petroleum especially the volatile oils also present 
a serious fire hazard and in the case of oils which are shipped in 



SPECIFIC CARGO RISKS 215 

tins packed in wooden cases the loss by leakage through the 
rusting of the tins is very considerable, especially in the event of 
a casualty. 

Leakage and Breakage. — The subject of leakage and breakage 
in connection with the insurance of manufactured articles is an 
important one. While the policy in its original form does not 
assume liability for ordinary leakage or ordinary breakage, the 
exigencies of business require that in many cases these risks 
be assumed by the. underwriter. This is, of course, an extra 
hazardous form of insurance and the successful underwriting 
of these risks depends in large measure in preparing clauses in 
which the biu*den of assuming usual leakage or breakage losses is 
thr^twn on the assured. The underwriter becomes responsible 
for only those losses which because of their degree indicate that 
the commodity has been subjected to some unusual condition. 
The rate of premium for these forms of insurance depends in large 
measure on the article itself and the nature of its package. In 
the case of leakage the heaviness of the oil or liquid and its tend- 
ency to thin and become more fluid under heat is an important 
feature. It must be remembered that a package that leaks at all 
will, if the voyage is long enough, probably result in a total loss 
of the contents, and under the pressiu'e to which cargo is subjected 
in the hold of a vessel during the voyage the probabiUty of strain 
on the package is very great. Breakage even in larger measure 
is dependent on the commodity and its package. Small articles 
well packed will usually carry without breakage, and if breakage 
occurs the loss will not be total but will probably involve only a 
few of the articles in the package. On the other hand, large single 
articles such as statuary and plate glass if broken at all, usually 
result in a total loss, and it is almost impossible to name a rate 
within reason which is adequate to recoup an underwriter for 
losses sustained in insuring breakage on such articles. Such 
insurance is as a rule a matter of accommodation in connection 
with the general business of a merchant and the underwriter 
does not expect that this particular portion of the business will 
pay for itself. 

Common Carriers' Insurance. — Of late years an important 
cargo business has developed in the insurance of common carriers. 
The legal liabiUty of ocean carriers is not very great in view of 



216 MARINE INSURANCE 

the beneficial legislation which has been enacted in their favor 
such as the "Barter Act" (see appendix, p. 417) and other laws 
curtailing the Uability which the common law imposes on carriers 
by land or water. The steamship lines, especially the coastwise 
and lake lines, have, however, in order to attract business offered 
rates of freight that include insurance, or have offered to shippers 
their f aciUties in the procuring of insurance on cargo transported 
by their vessels. The carriers have accordingly arranged policies 
to covet these risks often of such size that the insurance is dis- 
tributed in shares among many underwriters. These pohcies 
are written either in blanket form, the carrier paying a fixed 
annual premium, or in floating form under which reports of 
risks applicable to the policy are made. As a rule these polfcies 
differ little from those issued to merchants, but the basis of 
valuation is ordinarily founded on what are known as commodity 
values. Freight rates are charged in accordance with the class 
into which a commodity falls, and in the valuing of cargo by the 
carrier for insurance purposes the same principle is used, a value 
per ton of weight for each class being established and reports 
being made and premium charged on the values thus obtained. 
It is usual in these poUcies for the underwriter to assume the legal 
UabiUty of the steamer with respect to the cargo insured, so that 
in the event of loss the underwriter has no recourse against the 
vessel for losses resulting through its neghgence. 

Common Carriers' Liability. — In this connection it is important 
to note that in the insurance of cargoes, this UabiUty of carriers is 
an important element in determining the rate of premium to 
be charged. Common carriers unless reUeved by statute, are 
liable for aU damage suffered by property in their custody unless 
caused by inherent vice, improper packing or the Act of God or the 
King's or the Government's enemies. This materiaUy reduces the 
UabiUty of the underwriter on cargo, especiaUy on the rail Unes 
where the UabiUty of the carriers conforms most nearly to its 
original form. While the underwriter under his original form of 
policy is Uable for these losses notwithstanding the Uability of the 
carrier, the assured agrees in the "Sue and Labor'' clause to sue, 
labor and travel in the defense, safeguard and recovery of the 
property, so that he is obUgated to proceed against the carrier 
to recover for the loss or damage suffered before calling on his 



SPECIFIC CARGO RISKS 217 

underwriter to pay. In order that this duty and obligation may 
be more perfectly established it is usual to find in cargo policies 
clauses which make the poUcy void to the extent of any liability 
which a carrier may have under the common law or otherwise, and 
which also make the policy void if. there be other insurance pro- 
vided by the carrier or other third person which would be valid 
if the poUcy held by the merchant had not been issued. Carriers 
in many cases have inserted in their bills of lading clauses to the 
effect that in the event of their settling a claim on cargo they 
shall have by assignment the benefit of any insurance on the 
property. Underwriters have in turn made their policies void 
in this respect if the assured accept a bill of lading containing 
such a stipulation. 

Parcel Post and Registered Mail Insurance. — ^The subject of 
cargo insurance is so vast that no effort has been made to treat it 
in detail, the foregoing discussion merely serving to indicate 
some of the problems confronting the underwriter in this branch 
of insurance. Under the heading of cargo insurance is usually 
included shipments made by parcel post and registered mail, a 
very unsatisfactory form of insiurance because of the fact that 
usually proper proofs of loss cannot be obtained. It is seldom 
known on what vessel a package is shipped and the mere fact 
that it does not arrive at destination is usually proof of its loss. 
Whether non-delivery is due to a marine loss, a fire or a theft 
cannot be established, the consequence being that an underwriter 
must charge a high rate on such shipments to provide for all 
possible contingencies. Shipments by registered mail are, of 
course, more carefully watched than are those by parcel post, and 
this method of transit is used in the shipment of securities and 
currency and other high valued commodities of small bulk. 

Securities and Currency. — In the shipment of securities and 
currency by registered mail it is usual for the underwriter to re- 
quire that the contents be counted and the packsige sealed by a 
notary public, who under his seal gives a certificate of the contents 
of the package. The insurance of currency is, of course, more 
hazardous than the insurance of securities, because the latter can 
usually be replaced upon the giving of proper bonds which are at 
the expense of the underwriter, whereas currency when lost 
cannot be reissued. The shipment of gold, currency and pre- 



218 MARINE INSURANCE 

cious bullion under bill of lading is also an important item of 
insurance, especially when it is necessary to ship gold from 
one country to another to equalize exchange rates. Such ship- 
ments are insured from bank to bank and because of the extreme 
care and protection afforded, offer little except a total loss hazard 
to the underwriter. 



CHAPTER 13 
HULL INSURANCE 

Classes of Hull Insurance. — Hull insurance, the second of the 
three general divisions of marine insurance may be subdivided 
into four broad groups, each characterized by the type of vessel 
involved, viz.: sail, auxiUary sail, steamers and power boats. 
These four classes may again be separated into insurance placed 
on trip risks and that placed on the annual or time basis. A 
trip insurance is one whose termini are mainly geographical; 
that is, a risk which is insured from one port to one or more other 
ports, with perhaps a continuation of the risk in the final port for 
a specified number of hours or days after safe arrival. On the 
other hand, an insurance on time, whether on the annual basis 
or for a shorter period is limited entirely by the date of attach- 
ment and the date of termination, except in so far as the insur- 
ance may be made void by the breach of specific trading war- 
ranties. There is no limit in this country to the time for which a 
policy may be written, but in England the law provides a time 
limit of one year, and this period is by custom adopted in this 
country. In rare cases a combination of the trip and time forms 
are found, wherein a vessel is insured for a named voyage, the 
total time at risk, however, to be definitely limited to a given 
number of days or months. 

Single Vessel and Fleet Insurance. — Hull insurance may again 
be considered as falUng into two further groups, viz.: single vessel 
risks and fleet insurance. Formerly single vessel risks were more 
common among sailing vessels than steamers. Usually single 
individuals or groups of men jointly owned a sailing vessel, 
while steam tonnage was largely developed by companies who 
formed steamers into fleets and operated them over certain 
definite routes. Now, however, in the case of steamer tonnage, 
the custom is growing of forming a separate corporation to own 
each individual vessel, the corporation usually bearing the name 
of the vessel as the "Olympic Steamship Corporation." Thus 

219 



220 MARINE INSURANCE 

we find that even in large fleets each vessel is separately owned, 
although all the vessels in the fleet will be jointly operated by a 
corporation formed for this special purpose. The primary 
object in single vessel ownership is to make each vessel a xmit 
when any question of legal liabiUty arises, so that any judgment 
obtained can be executed only against the guilty vessel and not 
against all the vessels as would be the case if they were jointly 
owned. The managing corporation may charter all the vessels 
or it may merely load them and manage their operation. 

Single Vessel Risks. — ^As a rule single vessel risks from an 
underwriting standpoint merit a higher rate of premium than do 
vessels insured jointly as a fleet whether separately owned or 
not. The reason for this is obvious. A single vessel risk is 
rated on its own merits. It stands or falls by itself. If well built 
and in good condition and owned by persons whose record as ship 
operators or owners is good, it will be favorably considered. If 
badly built and in poor condition, with the further handicap of 
poor ownership it will either not be insured, or if insured by some 
venturesome underwriter, the policy will carry a high rate of 
premium. 

Fleet Insurance. — ^Fleet insurance, on the other hand, presents 
a very different problem. As a rule, the formation of fleets is a 
gradual process. New vessels are added from time to time, 
with the result that in a fleet there are usually found new vessels 
and old vessels, good vessels and those that are not so good. 
Considered as separate units an underwriter would be favorably 
disposed to insure the newer and better vessels, but would hesitate 
to accept lines on the older and inferior vessels. In writing fleet 
insurance, however, the underwriter as a rule cannot pick and 
choose, but must write all or none. Accordingly the underwriter 
accepts a percentage interest in the fleet, making a uniform rate 
for the whole, or as is often the case, dividing the fleet into groups 
in accordance with the merits of the respective vessels, and fixing 
a rate for each group. 

Moral Hazard. — In all branches of marine insiu'ance the 
question of moral hazard is important, but it is particularly vital 
in hull insurance. The character of the owner and the experience 
and ability of the manager of a single vessel or of a fleet are pri- 
mary considerations in the insurance of hulls. Bad ownership or 



HULL INSURANCE 221 

incompetent management means many losses, some of which 
may present evidence of unfair dealing. No asset is so valuable 
to a shipowner as his reputation. A good record will procure 
insurance on vessels which because of their age, for instance, 
would be otherwise uninsurable. On the contrary, a bad record 
in the owning and management of vessels which are in themselves 
good risks will make the procurement of insurance a difficult 
matter. Not only does bad management aflfect the procurement 
of insurance on the hull, but it also aflFects insurance on the cargo 
and freight. The matter of ownership and management affects 
not only the question of accident to vessels through errors of 
judgment in navigation, owing to the employment of incompetent 
masters and crew, but it concerns itself with the upkeep of the 
vessel with respect to its physical condition. A run-down 
vessel is a bad insurance risk from the underwriter's viewpoint, 
but it is also a bad risk from a financial point of view. A steamer 
with its delicate motive power cannot be neglected. * A wooden 
sailing vessel cannot be neglected or its hull and rigging will 
deteriorate. Vessels need constant attention, and if through 
mismanagement an owner neglects the upkeep of his vessels, his 
loss record will soon reveal the fact, even if it is not otherwise 
discovered by the underwriters. High rates or no insurance 
at all will be the inevitable result. 

The Value of a Vessel, — The determination of the proper 
valuation at which a vessel should be insured is not easy, owing 
to the various factors which affect the value. The amount should 
be fixed at the point where the owner will be fully reimbursed 
in the event of total loss, but will have no inducement to com- 
pass the destruction of his vessel in order to procure the insured 
value. Theoretically, the value of a vessel is the total of all the 
net freight which the vessel can earn during the ordinary period 
of such a vessel's usefulness plus its breakup value at the end of 
the period. Of course ,this estimated value will vary from time 
to time as freight rates increase or decrease with the demand for 
tonnage. However, as a practical matter, other considerations 
such as the increased cost of replacing such a vessel at the time 
of renewing the insurance, her increased earning power during a 
period of high freights, or generally the law of supply and de- 
mand are the determining factors in fixing the value of the vessel. 

16 



222 MARINE INSURANCE 

It must be considered that during a period of one year the 
whole freight rate and vessel situation may change, and a 
fair value at the inception of the poUcy based on the then 
existing conditions, may before the poUcy expires produce a 
moral condition which offers temptation to the unscrupulous 
owner. 

Valuation Should be Reasonable. — To the underwriter who is 
issuing full form insiu'ance, as it is called — ^that is, is writing a 
policy covering particular average losses as well as general average 
and total loss risks — the valuation is vital, because his Uability 
for partial loss is fixed by the percentage of the total value which 
he insures. Thus, if he does not insist on a reasonable value, and 
prevent by agreement the placing of an undue proportion of the 
value against total loss, general average and salvage charges, he 
will in the event of partial loss, find that he is charged with an 
unreasonable amount as his share of the repair bills. In order 
that underwriters may protect themselves in this respect it is 
usually warranted that only a stipulated percentage of the full 
value of the vessel may be placed under limited form insurance. 
Reference has already been made to the custom of separating the 
total value into parts, one applying to the hull and its fittings and 
another to the machinery. In some cases hull values are further 
divided into hull and cabin outfit, while the machinery value may 
be separated as in the case of refrigerated vessels, into propelling 
and refrigerating machinery. 

Trading Warranties. — The trading warranties are also of very 
great importance in the insurance of hulls. Vessels when built 
are usually designed for some specific service, such as lake trade, 
coastwise trade or ocean service. If used out of these trades, 
weakness may develop resulting in serious losses. Accordingly, 
when issuing policies, underwriters by express warranty definitely 
indicate the geographical limits within which the vessel may 
operate in order not to void the insurance. These warranties 
range all the way from clauses limiting a vessel to service in a 
named port, or along a limited strip of coastline to world-wide 
limits permitting trade on any of the seven seas. In poUcies 
insuring vessels operating on the Great Lakes and in certain other 
localities a further trading warranty as to time is inserted limiting 
navigation to the open season. 



HULL INSURANCE 223 

Institute Warranties. — The trading warranties in most general 
use are the American or London Institute Warranties. This 
clause permits practically world-wide trade, exceptions being 
made, however, of British North America on the Atlantic Coast 
except certain coaling ports and British North America on the 
Pacific Coast north of fifty degrees, of certain portions of the 
Baltic Sea and of ports on the northernmost coast of Europe. 
Exception is also made of trade to Behring Sea, Alaska or Siberia, 
except Vladivostock between May first and November first. 
The exceptions, it will be noted, all relate to trade in Northern 
or Arctic sections where navigation because of ice and fog is 
extra hazardous, but with certain exceptions provision is made 
for the cancellation of these warranties upon the payment of 
additional premimn. A further restriction is found in these 
warranties prohibiting the carriage of Indian coal between March 
first and June thirtieth. 

Loading Warranties. — ^Loading warranties are not uncommon 
in hull policies. A New York form used for sailing vessel risks 
prohibits the vessel from loading more than her registered under 
deck capacity with lead, marble, coal or iron on any one passage 
and also warrants that the vessel will not use any of the Guano 
Islands, nor load lime under deck. These loading warranties 
are inserted either because the cargo named is heavy and an 
undue quantity will imperil the safety of the vessel or because the 
commodity as in the case of Ume is dangerous in its own nature. 

Purpose of Warranties. — Obviously trading or loading warran- 
ties may be made in any form, but the object the underwriter has 
in mind in inserting them is to prevent the vessel proceeding 
under the form of policy issued and at the rate charged to other 
trades than that for which charge was made or for which the 
vessel is suited. The rate of premium depends in large measure 
on the trading warranties required. It is usually cheaper for 
the assiu'ed to restrict the trading warranties obtaining a low 
basic rate and then if it becomes necessary to send the vessel out 
of these warranties, to obtain the underwriter's assent to such 
extended service by the payment of an additional premium. 

Average Clauses. — ^Average clauses in hull policies are usually 
either in the minimum franchise form or in the deductible average 
form. The item of insurance being an important one in the cost 



224 MARINE INSURANCE 

of operating a vessel, the assured seeks to obtain protectionat the 
lowest possible cost. If his experience with respect to partial 
loss has been favorable he may decide to assume small partial 
losses and thus obtain a reduced rate. It is, therefore,, quite 
common to find in hull policies deductible average clauses. 
The deductible franchise will vary from five hundred dollars as in 
the case of the Standard Lake Hull insurance form to several 
hundred thousand dollars as in the case of some of the huge 
trans-Atlantic liners, where the procurement of full coverage is a 
difficult matter owing to the fact that the great value may exhaust 
the world's insurance market. Special inducement has to be 
offered to entice underwriters to write large lines and the large 
deductible average franchise is. one of the baits offered. 

Three Percent Average Clause. — ^As a rule the minimmn 
franchise form of average clause is the one used in hull policies, 
in the case of steamers or motor vessels the franchise applying 
to each valuation separately or to the whole value. The fran- 
chise is usually fixed at three or five percent, but this percentage 
applied to a high value produces such a large sum as a minimum 
claim under the poUcy that a minimum amount in dollars is 
inserted such as twenty-four hundred and twenty-five dollars 
(five hundred pounds sterling) or forty-eight hundred and fifty 
dollars (one thoiisand pounds sterling). The average clause in 
most common use in steamer insurance reads: 

"... this policy is warranted free from particular average under 
three percent, or unless amounting to $4850, but nevertheless when the 
vessel shall have been stranded, sunk, on fire, or in collision with any 
other ship or vessel, underwriters shall pay the damage occasioned 
thereby, and the expense of sighting the bottom after stranding shall 
be paid, if reasonably incurred, even if no damage be found." 

"... Average payable on each valuation separately or on the 
whole, without deduction of thirds, new for old, whether the average be 
particular or general." 

Separate Valuations. — The practical working of the separate 
valuation clause will appear from the following illustration. 
A steamer is insured on a valuation of three hundred thousand 
dollars, divided two hundred thousand dollars on hull and one 
hundred thousand dollars on machinery. The vessel encounters 



HULL INSURANCE 225 

very heavy weather causing damage not only to the super- 
structure and the hull itself but also to the machinery. The loss 
on the hull when adjusted amounts to seventeen hundred and 
fifty dollars and on the machinery to three thousand two hundred 
and fifty dollars. If separate valuations were not used and 
there was no minimum franchise of forty-eight hundred and 
fifty dollars there would be no claim on the underwriters in this 
case as the total loss suffered is five thousand dollars whereas 
three percent on the total value of three hundred thousand 
dollars is nine thousand dollars. Under the separate valuation 
plan, however, there is a valid claim on the machinery, three 
percent on the valuation of one hundred thousand dollars being 
three thousand dollars and the claim on machinery as adjusted 
being three thousand two hundred and fifty dollars. There 
would, however, be no claim on the hull, three percent on this 
valuation being six thousand dollars and the adjustment showing 
a loss of only one thousand seven hundred and fifty dollars. 
Here, however, the minimum franchise becomes operative. The 
loss is adjusted on the whole value and a valid claim is proved, 
the total amount of loss being five thousand dollars and the 
minimum franchise but forty-eight hundred and fifty dollars. 
Were this minimmn franchise not inserted and the valuations 
separated, shipowners would find that a three percent average 
clause left a very heavy burden upon them. 

Thirds Oflf. — The separate valuation clause quoted above con- 
tains an expression in the negative, i.e., "without deduction of 
thirds, new for old, " which refers to one of the common principles 
of hull underwriting. This principle came into operation in the 
days of wooden ships and was based on the theory that in case 
of repairs to a vessel, the new material suppUed left the vessel 
in better condition than before the accident and that the under- 
writer should not, therefore, bear the whole burden of the loss. 
That this theory was sound in the case of a vessel that had been 
in service for some time, there can be no doubt, but in the case 
of new vessels meeting with disaster, it is difficult to establish 
that the repaired vessel is a better one than it was before the 
disaster. Because it was impracticable to treat each case on its 
merits an arbitrary percentage of deduction was established and 
the "thirds off" clause came into use. With the introduction 



226 MARINE INSURANCE 

of metal as a medium for the construction of vessels, it was still 
more difficult to establish the fact that the new metal inserted to 
replace the old resulted in any improvement in the vessel, and the 
custom has grown as in the clause above cited of waiving this stipu- 
lation at least with respect to the steel or iron portions of the vessel. 

Modified "Thirds Off" Clauses.— That the doctrine of the 
deduction of thirds is right in principle there can be no doubt, 
but that the arbitrary adoption of a fixed rate of deduction in 
all cases works a hardship on the assured is equally true. Many 
modifications of the "thirds ofif" clause have been made each 
striving to fix a scale of deductions which would be more equit- 
able to the assured. It will be foimd that in some of these 
clauses there is a sliding scale of deduction, the amount gradually 
increasing with the age of the vessel. This is especially true 
with respect to the yellow metaling on the hull of wooden vessels. 
The doctrine of "thirds off" is also applied in the settling of 
general average losses, but here again sliding scales of deductions 
have been adopted in order to arrive as nearly as possible at a 
fair basis for the settlement of all cases. 

Machinery Claims. — ^For many years after the introduction of 
steam engines as the motive power of vessels, it was doubtful 
whether or not the general words in the policy form reading "and 
all other perils, losses and misfortunes, that have or shall come to 
the hurt, detriment or damage of the said vessel, or any part 
thereof" would include losses caused by the bursting of boilers 
or other losses occasioned through accident to the machinery of 
the vessel. To definitely settle the point a test case with respect 
to the breakage of the air chamber of a pump operated by a 
donkey engine on the steamer "Inchmaree" through the appar- 
ent neghgence of the crew, was taken up to the House of Lords 
in England. After careful consideration of the particular facts 
in this case and of the conflicting decisions rendered in similar 
cases they unanimously decided that such loss was not occasioned 
by a cause of the same nature as "a peril of the sea," and held 
that the underwriters were not liable. 

Inchmaree Clause.— Following this decision, m order that 
protection against loss by casualties of this nature might be 
given to shipowners, a clause known as the "Inchmaree" clause 
was introduced into hull poUcies, which reads as follows, viz. ; 



HULL INSURANCE 227 

"This insurance also specially to cover (subject to the free of average 
warranty) loss of, or damage to hull or machinery, through the negligence 
of master, charterers, mariners, engineers, or pilots, or through explo- 
sions, bursting of boilers, breakage of shafts, or through any latent 
defect in the machmery or hull, provided such loss or damage has not 
resulted from want of due diligence by the owners of the ship, or any 
of them, or by the manager. Masters, mates, engineers, pilots, or crew 
not to be considered as part owners within the meaning of this clause 
should they hold shares in the steamer." 

The clause now appears in most hull policies on vessels propelled 
by mechanical power, and has the effect of adding a new group 
of perils to those already enumerated in the printed form of 
policy. Its use has been unfortunate for the underwriters in 
connection with the new internal combustion engines with which 
the modern auxiliary sailing vessels are equipped, because 
of the fact that many machinery claims have resulted from ap- 
parent lack of knowledge on the part of the engineers charged 
with the operation of this comparatively new type of marine 
engine. 

Collision Liability. — Incorporated in most hull policies there 
is found a clause known as the Collision or Running Down 
Clause which in reality is a separate liability insurance. The perils 
clause in the policy takes care of physical losses sustained by the 
vessel through collisions. There is, however, another collision 
liability which is concerned not with the damage sustained by 
the vessel itself, but the damage sustained by the vessel with 
which the insured vessel has collided, or by its cargo or by the 
passengers or crew of the vessels. It is this liability to which the 
Collision or Running Down clause refers. Under the law a 
vessel, if negligently colliding with another vessel, is liable for 
the resultant damage caused to the other vessel and its cargo 
and fox loss of life or personal injury if occasioned by such negli- 
gence. This liability also extends to piers, harbor walls, break- 
waters or other objects with which a vessel may negligently 
come into violent contact. There are various forms of collision 
clauses, but the form in general use (see A. H. U. A., form No. C-1, 
appendix, p. 373) affords protection against merely the liability 
for physical injury to another ship, its freight and cargo and for 
demurrage due to its owner for the time he is deprived of the use 



228 MARINE INSURANCE 

of his vessel, but only to the extent of the insured amount in the 
policy. The underwriter, however, assumes no liabiUty for 
consequential injury to harbors, wharves, piers, stages or other 
similar structures, or for the removal of obstructions to naviga- 
tion caused by the collision, nor for the loss of life or personal 
inj ury. The clause also excludes liability for loss of the cargo or the 
freight engagements of the insured vessel. The necessity of 
limiting liability to the proportion of the insured value which the 
underwriter assumes, not exceeding the face amount of the policy, 
will be apparent when it is considered that there is no limit to the 
liability of the vessel owner for losses due to negligence, all his 
property being subject to attachment, unless he invokes the law 
and obtains a limitation of liabiUty to the value of the offending 
vessel in her condition after the accident. This limitation will 
usually be granted by the admiralty courts if it can be estabUshed 
that the owner personally is free from contributory negligence. 
This is usually so in collision cases, the negligence being due 
to the master, mariners or the pilot. In the United States 
the law permits a limitation of liability to the actual value of the 
offending vessel after the collision, to which is added the freight 
being earned on the passage. If the vessel is worth more than 
the claims against it the owners will keep the vessel and pay the 
damages, if the claims exceed the value of the vessel the owners 
will probably abandon the vessel to the claimants. In England 
the limitation of liability is fixed by law at eight pounds sterling 
(£8) per gross ton in the event of property damage or at seven 
pounds sterling (£7) per ton additional if there be loss of life or 
personal injury. These sums are fixed standards whether the ship 
be an old wooden sailing vessel or a new high speed ocean grey- 
hound and are made regardless of the real value of the vessel per 
ton. 

Legal Expenses in Collision Cases. — Under the Collision clause 
underwriters also assume responsibihty for their respective pro- 
portions of the legal expenses in connection with the establish- 
ment of the liabiUty of the owner. Provision is also made for 
the settlement of losses, if it should be decided that both vessels 
are to blame for the coUision, on the principle of cross liabilities, 
in order to avoid a multiplicity of financial transactions. Owing 
to the fact that many vessels may be the property of a single 



HULL INSURANCE 229 

owner and two of these vessels may come into collision, it is 
provided in the clause that the fact of the conunon owner- 
ship shall be disregarded and settlement made as if the vessels were 
separately owned. Provision is also made for the adjustment 
of the liability under this clause by arbitration, the owners ap- 
pointing one arbitrator, the underwriters a second, these two 
arbitrators appointing a third before entering on their conference, 
the decision of this arbitrator or of any two of the arbitrators 
to be binding on all concerned. 

Club Insurance. — The policy in its ordinary form does not af- 
ford protection against the liability of a vessel owner for damage 
to the cargo in his possession due to negligence nor for injury 
to persons, through acts of the owner or his agents. Neither does 
it provide protection against the Uability, modified by exemption 
clauses, with which the owners are charged under the bill of 
lading. These liabiUties are a very serious matter for vessel 
owners and they have accordingly formed mutual protective 
associations which assiune these liabilities, each owner entering 
his vessels in the association and paying a fixed rate per ton for 
the protection thus afforded. The associations are sometimes 
called clubs and such insurance is commonly referred to as Club 
Insurance. These associations have been established for many 
years in Great Britain, but it is only recently that a Mutual Pro- 
tective Association of Shipowners has been authorized by law in 
New York and such an organization formed. 

Protection and Indemnity Clause. — The establishment of these 
clubs has had a direct bearing on the ordinary form of marinein- 
surance. It was formerly the custom for underwriters to assume 
under the Collision Clause only three-fourths of the collision 
liabiUty and to assume none whatever for loss of life or personal 
injury or for damage to harbors, docks, piers, nor for damage to 
goods on board the vessel, nor for any other liability for which the 
owner might be held by law. This was done on the theory that 
leaving one-quarter of the collision liability with the owner 
would make him more diligent in seeing that his vessel was 
carefully navigated, and that the other liabilities were not such 
risks as a marine underwriter should assume, because freeing the 
owners from these liabilities would result in less careful opera- 
tion of vessels. The acceptance of these risks by the Clubs 



230 MARINE INSURANCE 

however removed all the supposed advantages of leaving them 
with the owners, with the result that underwriters were willing 
to assume these risks. Accordingly the three-quarter limitation 
is usually omitted from the Collision Clause, and the other lia- 
bilities assumed by the Clubs are sometimes insured by imder- 
writers under Protection and Indemnity clauses as they are 
known. In many cases however these risks are as a matter of 
economy left with the Clubs, this form of insurance being inex- 
pensive, although the members are subject to assessment. Some 
owners however prefer to have all their liability covered under 
a single poUcy and the "P and I" clause as it is usually called 
will in such cases be inserted in the policy. 

Cancellation and Lay-up Return Premiums. — Reference has 
already been made to the basic principle of marine underwriting, 
namely, that the policy having attached the premium is earned 
regardless of the fact that through some unforeseen event, either 
the transfer of ownership or the loss of the vessel through a peril 
not insured against, the owfaer is divested of his property before 
the conclusion of the policy term, thus relieving the underwriter 
of a portion of his risk. Hull insurances being written as a rule 
for a period of a year the strict enforcement of this rule in the 
case of the sale of a vessel might work a hardship. Accordingly 
it is now customary to provide for the cancellation of the policy 
by mutual agreement, return premium being made at a feed rate 
for each uncommenced month. It also happens in many cases 
that vessels will be laid up for repairs or without employment for 
considerable periods. The rate charged is based on a vessel in 
navigation, whereas during the period of repair or non-employ- 
ment the vessel is in port exposed to a minimum of risk. Pro- 
vision is therefore made for the payment of a return premium 
at a fixed rate for each consecutive period of fifteen or thirty 
days the vessel may be laid up in port. It should be observed 
however that a vessel is laid up only when it is out of commission 
and not engaged in the ordinary course of its employment. That 
is, a vessel cannot be considered as laid up, when because of the 
congested condition of a port it remains in the harbor for a long 
period in order to discharge inward cargo and to load outward 
shipments. Claims for lay-up returns are sometimes made under 
these circumstances and careful scrutiny of them is always neces- 



HULL INSURANCE 231 

sary. It was formerly the usual practice that lay-up claims were 
not allowed when the lay up was the result of repairs which were 
at the expense of the underwriters. This provision is still made 
in some underwriters "lay-up'' forms and is also found in the 
Standard "Lake Time Clauses" used in the insurance of vessels 
operating on the Great Lakes. 

"And Arrival." — It will be noticed that the usual form of clause 
providing for lay-up returns and cancellation returns ends with 
the words " and arrival. " Unexplained, the words appear mean- 
ingless and it would seem that an expression covering the point 
intended could have been devised that would at least have been 
intelligible to the lay mind. It has been stated that the premium 
is earned when the policy attaches, and that the destruction of 
the vessel before the expiration of the policy term will not give 
the assured the right to claim return premium for the unexpired 
time. The expression "and arrival" is a restatement of this 
principle. In common words it means that at the time of claim- 
ing return premium for mutual concellation or for lay-up re- 
tm-n the vessels must have arrived, be in existence and in good 
safety. Return premimn will not be paid if the vessel has been 
lost or is missing. Lay-up returns are not claimable until after 
the expiration of the policy and if the conditions of " and arrival" 
were fulfilled at the end of the policy term the mere fact of the 
subsequent loss of the vessel will of com^e in no way affect the 
claim for lay-up return premium. 

Extension into Port. — ^A clause is usually found in hull policies 
providing that if the vessel be at sea upon the expiration of the 
poUcy term, the policy may be extended at a pro-rata monthly 
premium until arrival in good safety at her port of destination 
or at the first port of call, provided request for such extension 
be made prior to the expiration of the policy. Similar privilege 
should always be granted for extending the policy to the port of 
destination if the vessel be in distress, or at a port of refuge or at 
a port of call, the underlying idea in each case being to relieve the 
assured from the burden of arranging new insurance when the 
vessel is at sea or when it is in a disabled or damaged condition. 

General Average. — Reference is frequently made in hull poli- 
cies to the subject of general average, provision being made that 
these charges as well as salvage charges shall be payable in ac- 



232 MARINE INSURANCE 

cordance with the York-Antwerp Rules, 1890, if so provided in 
the contract of affreightment. It is also provided that in cases 
where these rules do not apply that adjustment shall be made in 
accordance with the laws of the United States. The York-Ant- 
werp Rules are considered in connection with the subject of gen- 
eral average. This body of rules was adopted at an International 
Conference and seeks to establish a uniform practice in regard to 
general average and salvage adjustments. Similar clauses refer- 
ring to the York-Antwerp Rules appear in many cargo policies. 

"Total Loss Only" Insurance, — It is quite customary for 
owners, through desire or from necessity, to insure vessels on 
what is known as the "total loss only'' form. This form is 
frequently used in the insurance of vessels which because of 
their condition cannot be written at favorable rates on a full 
cover form. It is also usual to cover disbursements and excess 
values on the total loss only form. In some cases this form of 
protection is broadened to include general average and salvage 
charges in addition to total and constructive total losses. When 
the value of vessels is high, difficulty is often experienced in 
obtaining sufficient fuU cover insurance and the final lines are 
accordingly placed on "total loss only'' form. However, in 
order that the use of such ins\u*ance shall not be abused at the 
expense of the full form underwriters, clauses have been devised 
limiting the percentage of the total amount which may be 
placed on the total loss form. In many cases owing to very high 
values these warranties are waived and a larger percentage of 
"total loss only" insurance is permitted. 

Port Risk Insurance, — When vessels are laid up in port for 
long periods of time undergoing repairs or reconstruction or 
without employment, it is usual to place insurance on a "port 
risk only" form. Under this form of policy the assured often 
warrants that the vessel is laid up and out of commission and that 
the vessel will be confined during the term of the policy to the 
limits of the port described. Privilege is granted for the vessel 
to change docks or to go on drydock in order to make repairs or 
alterations. The Collision Clause and the "Inchmaree" clauses 
are usually incorporated and it is sometimes agreed that average 
will be payable without reference to percentage, that is the aver- 
age clause does not require that any fixed franchise be attained to 



HULL INSURANCE 233 

make a claim under the policy. As there are no navigation haz- 
ards in connection with port risk insurance, except during docking 
and changing docks, the rate of premium is low. It is charged 
on a monthly basis or at an annual rate usually subject to can- 
cellation in accordance with the short rate tables. These tables 
provide for a premium charge for the actual time at risk which is 
calculated not as a pro rata portion of the annual rate, but at a 
fixed percentage of the annual rate. The short rate is always 
higher than the pro rata charge for the same period. 



CHAPTER 14 

SPECIAL POLICY FORMS FOR THE INSUR- 
ANCE OF HULLS 

Special Hull Forms. — Special forms are quite an important 
feature in connection with hull insurance. These are not peculiar 
to any one Company, but have been formulated by underwriters' 
organizations and adopted by the individual companies in the 
issuance of their policies. The best talent in the underwriting 
Qeld has lent its aid in the construction of these forms, and the 
primary idea underlying all has been to oflFer to the vessel owner 
the most complete protection consistent with conservative 
underwriting principles. From time to time these forms are 
amended as new situations develop requiring a broadened 
form of protection, or underwriting experience suggests a more 
restricted form of policy. Previously the use of many different 
forms in hull underwriting led to confusion and difficulty in the 
making of adjustments. In cargo insurance, except in the case 
of very large accounts, one underwriter will assume the whole 
risk reducing his line if he considers it necessary, by the procure- 
ment of reinsurance. In hull underwriting, on the other hand, 
it has always been customary to have several underwriters on a 
single risk, hence the desirability of having uniformity among 
the policies issued by the different underwriters. 

Work of the Hull Associations. — The American Hull Under- 
writers' Association has stood in the forefront in endeavoring to 
procure uniform standards of hull insurance, and they have 
promulgated forms which are now in general use in this country. 
Working in close harmony with similar associations on the Pacific 
Coast and in Great Britain, certain forms have been drawn up 
which are practically standard in all the underwriting markets 
of the world. Forms for steamer risks, auxiliary sailing vessels, 
port risks and builders' risks have been recommended for use by 
this organization. Similar associations, such as the Atlantic 
Inland Association, have drawn up inland marine forms. Asso- 

234 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 235 

ciations of underwriters primarily interested in the insurance of 
sailing craft such as the Provincial Schooner Association have 
promulgated forms especially adapted to these particular branches 
of underwriting, and forms especially designed for insurance of 
vessels on the Great Lakes are in common use. 

Basis of All Policies the Same. — While all of these retain as 
their basis the old skeleton form of policy, particularly the clause 
enumerating the perils insured against, special clauses are 
incorporated dealing with conditions which are peculiar to hull 
insurance of the particular kind to which the form has reference. 
In designing new forms there is always the danger that the entire 
policy will be weakened by the introduction of clauses which are 
ambiguous enough to permit of court interpretations foreign to 
the intention of the underwriters, or which may undermine the 
whole basic fabric of the poUcy. However, it has been this same 
hesitancy to make any change that has resulted in the peculiar 
combination of words which clothes the common form of marine 
policy. 

Rates of Premium. — On application by owners or insurance 
brokers, these underwriters' organizations also promulgate 
rates of premium for the insurance of vessels. The rates named 
are, however, merely the expression of an opinion by the organi- 
zation as a collective body of underwriters and are in no way 
binding on the members. Because the organization rates a 
vessel, there is no obligation on the individual member of that 
organization to accept a portion of the risk. At times it is the 
opinion of some underwriters that a diflferent rate is warranted 
but in general the rates and conditions and the forms promulgated 
are accepted by the members. There is, however, an obUgation 
on the part of the members not to accept insurance at less than 
the promulgated rate. 

The A.H.n.A. (1917 Form). — The form most commonly used 
at present in the New York market for the insurance of metal 
steamers is known as the A.H.U.A. (1917 form) the initials 
symbolizing the American Hull Underwriters' Association and 
the year named indicating the date of last revision (see 
appendix, p. 373). In general this form follows the basic 
principles of marine underwriting discussed in the previous 
chapters, but contains some special clauses which it is important to 



236 MARINE INSURANCE 

consider. It should be noticed that the simple statement found 
in the ordinary policy reading "upon the body, tackle, apparel 
and other furniture of the good ship, etc.," has been broadened 
to include the boilers and machinery of the steamer. The original 
clause giving the vessel Uberty to "proceed and sail to, touch 
and stay at any ports or places, etc.," has been broadened to 
permit the vessel specially to do practically anything that a 
vessel could or would do either in the ordinary course of the voyage 
or while in port or under repair. It should be further noted in 
the separate valuation clause that refrigerating machinery and 
insulation pertaining thereto is not covered by the policy imless 
expressly included or unless it is the property of the owners of 
the vessel. It is quite frequently the case that the great packing 
companies who import frozen and refrigerated meats, imder 
arrangement with the owners of vessels, will equip their steamers 
so that they will be fit to carry these highly perishable cargoes. 
Such equipment is not considered as part of the steamer itself, 
but must be specially insured. 

P.P.I, and F.I.A. Interests. — ^A poUcy on hull covering 
partial losses, total losses, general average and salvage charges is 
known as a "full form" insurance. The desirability of "full 
form" underwriters restricting so far as possible the amount of 
insurance placed over and above the full form insurance has 
already been indicated. In the form under consideration an en- 
deavor is made to compass this end in the following warranty, viz. : 

" Warranted that the amount insured for account of the Assured and /or 
their managers on Disbursements, Commissions or similar interests P.P.I, 
or F.I.A. shall not exceed fifteen percent of the insured valuation of the 
Vessel, but the Assured may in addition thereto effect P.P.I, or F.I.A. 
insurance on any of the following interests: 

Premiums (reducing ar not reducing monthly) to any amount actually 
at risk, and 

Freight and/or Chartered Freight and/or Anticipated Freight and/or 
Earnings and/or Hire or Profits on Time Charter and /or Charter for series of 
voyages for any amount not exceeding in the aggregate twenty-five percent 
of the insured valuation of the Vessel; and if the actual amount at risk on 
any or all of such interests shall exceed such twenty-five percent of the 
insured valuation of the Vessel, the Assured and /or their managers may, 
without prejudice to this warranty, insure whilst at risk the excess of such 
interests reducing as earned. 

Provided always that a breach of this warranty shall not afford under- 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 237 

writers any defense to a claim by mortgagees or other third parties who may 
have accepted this policy without notice of such breach of warranty, nor 
shall it restrict the right of the Assured and /or their managers to insure in 
addition General Average and/or Salvage Disbursements whilst at risk/' 

The interests specified in this warranty are real interests but 
may not be susceptible of proof by documentary evidence, 
hence the insurance is made under P.P.I, and F.I.A. conditions.. 
The underwriter in granting insurance on these conditions mutu- 
ally agrees with the assured that the mere fact of the existence of 
the policy proves the interest and that between them so far as 
the policy is concerned, the full interest of the assured to the 
extent of the amount of the policy is admitted. 

Purpose of the Disbursements Warranty. — This warranty has 
the effect of requiring the assured to place under full form insur- 
ance such a proportion of the total value of his vessel, that the ex- 
cess amounts insured as disbursements, commissions or similar 
interests, freights, etc., shall not exceed a total of forty percent of 
the full form value. If there be actual freight interests at risk in 
excess of twenty-five percent, the warranty is not violated by the 
insurance of such excess as underwriters could not, of course, pre- 
vent the insurance of a valid freight interest at risk, no matter how 
large it might be. However, it is stipulated that such insurance 
must be reduced as the freight is earned until the total of such 
interests comes within the twenty-five percent limit. The explana- 
tion of the various freight interests enumerated will be left for the 
following chapter; it will suffice for the present to state that 
freight isthe money which the owner receives either under charter 
or under bill of lading for the use of his vesseil. A similar exception 
is made in the warranty in relation to premiums. This too being 
a valid insurable interest, underwriters could not, if they would, 
prevent its full insurance. This entire clause is aimed not at the 
insurance of valid interests arising out of the ownership of 
vessel property, but at the practice of endeavoring to obtain 
cheap insurance by placing an undue portion of the value of a 
vessel under P.P.I, conditions at the comparatively low rate 
prevailing for this form of insurance, thus lowering the full form 
value and in turn the premium developed thereon, while the 
underwriters^ liability for partial losses remains to a great extent 
unchanged. 

17 



238 MARINE INSURANCE 

Breach of Warranty with Respect to Innocent Parties. — 

It is further provided that a breach of this warranty as to P.P.I, 
insurance shall not affect the vaUdity of the policy with respect 
to innocent third parties, such as mortgagees, who may have 
accepted the poUcy without notice of such breach, nor shall the 
warranty restrict the right of the assured to insure disbursements 
made on account of general average and for salvage while such 
disbursements are at risk. The disbiu-sements referred to are 
amounts which the owners of the vessel may advance for the 
benefit of all concerned in the event of a casualty having occurred 
which involves general average or salvage expenses. 

Average Clause. — ^The usual form of three percent average 
clause appears in this form of policy. One of the casualties enu- 
merated in this clause is stranding, and in order that underwriters 
may be relieved of petty claims arising out of technical strandings, 
it is stipulated in a separate clause that grounding in the Panama 
Canal, the Suez Canal, the Manchester Ship Canal, or in certain 
other enumerated waterways, "shall not be deemed a stranding." 
The use of these channels at certain stages of the water may make 
grounding a natural occurrence and the underwriter by this 
stipulation seeks to avoid claims for these inevitable happenings. 
Furthermore, it is provided in the average clauses that in the 
event of stranding, the underwriters shall pay the expense of 
sighting the bottom, that is drydocking the vessel, if reasonably 
incurred, even if no damage be found. This provision places 
the underwriters in a strong position to insist on the examination 
of the vessel's bottom for possible injury, even if the owner 
prefers, owing to the delay involved, to defer such examination to 
a more convenient time. On the other hand, if the assured should 
drydock his vessel after a grounding in one of the excepted water- 
courses, the expense involved would not be at the charge of the 
underwriters as the casualty would not be a stranding within the 
meaning of the poUcy. 

Sale or Transfer of Ownership. — Provision is made that 
in the event of the sale, or the transfer of the ownership of the 
vessel, the policy shall be nuU and void from the date of the sale 
or transfer unless the underwriters agree in writing to continue the 
insurance for the new owners. This is in order that the under- 
writer may relieve himself of the necessity of continuing the 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 239 

policy if the new ownership is not satisfactory to him. Exception 
is made if the vessel be at sea, either with cargo or in ballast, in 
which case cancellation is suspended until the vessel arrives at 
final port of discharge if with cargo or at port of destination if in 
ballast. This exception is made in order to relieve the new 
owners of the difficulty of replacing the insurance while the 
vessel is at sea. 

Contributory Values. — Early in the World War when ship 
values began to increase by leaps and bounds underwriters, 
in certain cases of general average sacrifices and salvage expendi- 
tures, were held liable for these charges assessed against the ves- 
sel on her appraised value, in the proportion which the amount 
insured by them bore to the insured value. Thus, instead of 
being held liable for their percentage of the portion of the assess- 
ment applicable to the policy value, they were held liable for 
the same percentage of the entire assessment. Accordingly, 
to avoid this difficulty, the following amendment to the policy 
form was inserted, viz. : 

"Where the assured has paid, or is liable for, any general average 
contribution and the contributory value is greater than the insured 
value, the amount recoverable under this policy shall be only in the 
proportion that the amount insured hereunder bears to the contributory 
value and where the contributory value has been reduced by a par- 
ticular average for which these assurers are liable, the amount of par- 
ticular average claim under this policy shall be deducted from the 
amount insured under the policy in order to ascertain what share of 
the contribution is recoverable from these assurers; the extent of the 
liability of these assiu'ers for salvage shall be computed on the same 
principle." 

This provision harmonizes with the British practice in similar 
cases as set forth in Section 73 of the Marine Insurance Act (see 
appendix, p. 406). 

Effect of Breach of Cargo and Trade Warranties. — It is also 
provided in the form that breach of warranty as to cargo, trade, 
locality or date of sailing will not void the policy, provided notice 
of such breach or proposed breach be immediately given to the 
underwriters and such additional permium paid as may be re- 
quired. The form also contains the usual war or "free of cap- 
ture and seizure" clause relieving the underwriter from liability 



240 MARINE INSURANCE 

for war losses. A penalizing clause is also inserted in order to 
make the assured promptly notify the underwriters of surveys 
of the vessel to ascertain the extent of damage sustained and to 
make the assured take tenders for the repair of such damage 
rather than make private contracts for them. Other clauses 
are inserted in regard to cancellation for non-payment of pre- 
miums and other matters concerning adjustment of losses of 
which explanation is not necessary here. 

Lake Time Clauses. — ^The insurance of steamers plying on 
the Great Lakes and waters tributary thereto is so different in 
many respects from the insurance of vessels operating on the 
oceans that a special form known as the "Lake Time Clauses" 
(see appendix, p. 382) has been promulgated by the underwriters. 
An organization composed of vessel owners and known as the 
Great Lakes Protective Association has done much to improve 
conditions of management and operation on the Lakes and as an 
earnest of their belief in its efficiency it carries twenty-five 
percent of the value of the vessels entered in the association in its 
insurance fund. Accidents because of faulty navigation have 
materially decreased under the influence of the association. It 
will be observed that the Great Lakes consist of large bodies of 
water connected by narrow channels, and owing to the conges- 
tion in these connecting channels accidents were of frequent 
occurrence until the Protective Association became powerful 
enough to control in a measure the navigation of these waters. 
Severe penalties for faulty navigation of member vessels have 
done much to remedy the former reckless striving of masters to 
make lower lake ports regardless of the danger they themselves 
incurred and the menace their faulty navigation was to other 
vessels. An organization of Canadian vessel owners is also per- 
forming a similar service with respect to vessels under Canadian 
registry. 

Restrictions as to Navigation. — Perhaps the outstanding fea- 
ture of the Lake form is the navigation restrictions which are 
definitely set forth. The Great Lakes are navigable for a portion 
of the year only, since conditions, prior to April 16th and after 
November 30th, ordinarily making navigation impossible or extra 
hazardous. These are the limits fixed for the operation of metal 
steamers, while wooden vessels are further restricted to sailings 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 24 1 

between May 1st and November 15th inclusive. The restrictive 
dates are sailing dates, vessels being permitted to proceed to 
destination even if some time elapses subsequent to November 
15th or November 30th as the case may be. Geographically, 
navigation is limited to the Great Lakes and their tributaries not 
below Lake Erie but including the Niagara River. These are the 
basic warranties upon which the rate of premium is calculated. 
At the foot of the policy there is added a schedule of options which 
may be exercised providing for navigation prior or subsequent 
to the conmiencement or termination of the time warranties in 
the case of steel steamers. It often happens that an open season 
wiU permit early and late navigation and as the government aids 
to navigation are not removed until about the middle of Decem- 
ber, such post season navigation does not incur any unduly haz- 
ardous risk. The additional premiums charged for these post- 
season sailings are considerable, while the ante-season sailings 
are charged at pro-rata of the season rate, such navigation being 
permitted or being possible only in the case of an early spring. 
It will be observed, however, that none of these extra sailings are 
covered unless special notice is given to the underwriters. 

Extension of Navigation Limits. — ^Also in consideration of 
additional premium Uberty is granted vessels to proceed to ports 
below Lake Erie, though such navigation is, of course, restricted 
by physical conditions. The Welland Canal and the canals on 
the St. Lawrence River are large enough to acconmiodate only the 
smaller boats operating on the Great Lakes. In fact the whole 
of lake navigation is controlled by the capacity and depth of the 
channels whether river or canal, connecting the various lakes. 
Much money has been spent by the American and Canadian 
Governments in the improvement of these waterways, but the 
increase in size of lake vessels has kept pace with the increased 
depth in the channels. 

Winter Mooring Clause. — ^Notwithstanding the fact of these 
time and trading warranties, lake hull policies are ordinarily 
written for a period of one year, the vessels being laid up and out 
of commission during the closed season. A clause called the 
"Winter Moorings Clause" is accordingly incorporated in the 
policy providing that winter mooring must be in places and under 
conditions satisfactory to the underwriters. A regular inspection 



242 MARINE INSURANCE 

service of winter moorings is maintained by the underwriters with 
the result that conditions in this respect have greatly improved 
in recent years. It is interesting to note in this connection that 
owing to the congestion in the handling of gram cargoes on the 
lakes it is customary for vessels at the lower lake ports to retain 
their grain cargoes on the last trip down, discharging the grain 
from time to time during the winter as the congestion at the 
grain elevators is relieved. In like manner grain is loaded on 
vessels moored at upper lake ports during the winter and stored 
pending the opening of navigation, when the vessel fully loaded 
proceeds to her destination. This system of winter storage of 
grain aids greatly in the movement of the grain crop. 

Deductible Average Clause. — Instead of having the average 
clause customary in the insurance of ocean vessels, a deductible 
average clause with a deductible franchise of $500 is found in the 
Lake form. Adjustments are made on the basis of a three percent 
average clause but from the claim as adjusted on each accident 
there is deducted this $500. In the event of total or constructive 
total loss no such deduction is made. It is further provided that 
on vessels sailing during April or December the underwriters 
shall be Uable only for the excess of three percent each accident on 
the insured value with respect to aQ claims arising from damage 
by ice, except total or constructive total loss so caused. The 
Collision clause also contains the $500 deductible franchise. 

Lay-up Clause, Change of Interest. — As lake vessels are 
permitted to navigate only during the open season, the vessels 
must be laid up in port at all other times. The provision for 
lay-up returns therefore applies only to lay-ups occurring during 
the season of navigation, while the portion of the annual rate 
applying to the closed season represents merely a port risk charge. 
It is also provided that change of interest in the vessel insured will 
not aflfect the vaUdity of the policy. In this the pohcy differs 
materially from other forms where it is usual to require the 
assent of the underwriter to a change of interest. It is also cus- 
tomary to incorporate in Lake Policies a Protection and Indemnity 
Clause which is very broad in the protection afforded, even ex- 
tending to claims for loss of life and personal injury, unless such 
claims are made under Workman's compensation or other 
similar acts. 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 243 

Wooden Sailing Vessels. — Policies written to cover the hulls of 
wooden sailing vessels display few peculiarities, these poUcies 
ordinarily being written on forms that adhere very closely to 
the original basic form of policy. The average franchise is 
usually five percent, with provision made in some policies for 
a minimum claim for partial loss of $500. The " thirds off " clause 
is usuaUy incorporated with various modifications respecting 
anchors, chains, yellow metal or sheathing and other metal parts 
of the vessel. The colUsion clause is usually in the three-quarter 
form, the owner bearmg one-quarter of this UabiUty. The under- 
writing of wooden saiUng vessels is engaged in by only a limited 
portion of the insurance market. The amounts to be placed are 
relatively small, and the risks involved are naturally more haz- 
ardous that in the case of mechanically propelled metal vessels. 
In fact the wooden sailing vessel business was in a decadent con- 
dition at the outbreak of the World War. The powered vessel 
had driven the few remaining wooden ships into the carrying of 
rough cargoes such as coal and lumber in the coastwise trade. 
The demand for tonnage, however, caused a revival of the wooden 
sailing vessel and within recent years many ships of this type 
have been built. Unfortunately, tempted by high freight rates 
the owners of many of these vessels entered them in trade across 
the North Atlantic, a service for which they were poorly adapted, 
with the result that many fell a prey to marine perils while numer- 
ous others because of their lack of speed and of control became 
victims of submarines. 

Wooden Steamers. — The new types of wooden steamers de- 
veloped as a war emergency measure have presented a very 
serious problem to marine underwriters. The idea of the wooden 
steamer, of course, is not new, since the first steamers built were 
of this material, but the building of large high-powered wooden 
steamers of green or unseasoned wood by inexperienced ship- 
builders is a distinctly new departure. The forebodings of 
underwriters in regard to these vessels have been amply justified 
by the recent limited but significant experience. Poor work- 
manship by inexperienced ship carpenters, insufficient fastenings 
and green wood have produced steamers not fitted for ocean 
service, with the inevitable result that in many cases, a short time 
after sailing they have returned to port leaking or otherwise 



244 MARINE INSURANCE 

in distress. Underwriters have accordingly hesitated to assume 
the insurance of these vessels. Such insurance as has been 
granted has been written on "free of particular average American 
conditions'' terms, to which has been added a deductible average 
clause. The trading warranties are also very restricted practi- 
cally, confining the vessels to the United States Coastwise Trade. 
Under this form of policy the owner assumes a considerable 
portion of the risks mvolved. Whether or not the underwriting 
of these risks under this very limited form of policy will be profit- 
able, time alone will prove. 

The Internal Combustion Engine. — Within the last ten years 
considerable energy has been devoted to the construction of a 
practical marine internal combustion engine. The demand for 
tonnage has given new impetus to the construction and improve- 
ment of this type of motive power* Large internal combustion 
engines have been installed as the sole motive power of large- 
sized tramp vessels, and such ships have been operated with 
considerable success. This type of carrier is known as the motor 
vessel. However, a hybrid vessel, taking a place midway be- 
tween the wooden schooner and the motor vessel has made its 
appearance in large numbers and has brought to underwriters a 
number of new and perplexing problems. The vessels are 
known as auxiUaries, depending for their motive power partly on 
their sails and partly on the internal combustion engines with 
which they are equipped. 

The Auxiliary Sailing Vessel. — Theoretically the idea under- 
lying this type of vessel is excellent. In fair weather and favor- 
able winds the sail power can be used, the oil fuel being conserved 
unless indeed increased speed is desired when both forms of 
motive power can be used conjointly. In foul weather when an 
ordinary sailing vessel might be driven far from her course, en- 
taiUng much delay in the prosecution of the voyage the aux- 
iUary vessel with her mechanical power can at least be kept on 
her course, even if Uttle forward progress is being made. Most 
of these vessels have been constructed of wood, many of them on 
the Pacific Coast where excellent ship lumber may be obtained 
at reasonable cost. Faulty design in the early forms of this type 
produced vessels which were neither sufficiently equipped with 
sail or mechanical power rendering them subject to the mercy 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 245 

of the waves and wind in heavy weather. Other vessels were too 
Ughtly built to withstand the extra weight of the motor engines 
and the vibration caused by their operation. It has also been diffi- 
cult to fasten these comparatively heavy engines to their wooden 
beds, so that they will not loosen under operation. 

Defects in Motive Power. — While most of the faults of this 
nature have been remedied, the fact remains that because of 
the engines themselves the hazard m connection with the insur- 
ance of these vessels is very great, and the experience of under- 
writers in insuring them has been exceedingly bad. It is difficult 
to determine whether the fault is with a new type of engine which 
has not yet been perfected to the point where it is entirely depend- 
able as a marine engine, or whether the fault is with the inexperi- 
ence of the engineers, who, trained in the use of the steam engine, 
are unfamiUar with the pecuUarities of an explosive motor. Per- 
haps a combination of both reasons would give the true cause of 
the many accidents which have happened to the motive power 
of these vessels resulting in heavy claims on the underwriters. 

A.H.n.A. Auxiliary Sailing Vessel Form. — To overcome 
the weaknesses which have appeared in the underwriting of these 
vessels and to place the business on a safer foundation the 
American Hull Underwriters'Associationhas recently promulgated 
a form for the insurance of Auxiliary SaiUng Vessels either of 
wood or steel construction and for Wooden Motor Ships. This 
form (see appendix, p. 377) is a combination of the A.H.U.A. 
steamer form and the Boston Schooner form and follows in general 
the wording of these two forms with some restrictions as to loading 
and trading. The "thirds oflf" clause with modifications is in- 
serted and the collision clause is in the three quarter Uability form. 
The chief point of difference as may be expected in view of the 
foregoing remarks, is in connection with the average clause as it 
appUes to the machinery of the vessel. The clause inserted 
with respect to machinery claims is the result of evolution. 
The original clauses applying to such claims provided that, 
in the event of particular average on the machinery, the 
underwriters would not be liable except for the excess of ten 
percent upon the insured value of the machinery in respect of 
each accident. Experience soon showed that machinery clahns 
arising out of minor accidents quickly exceeded the ten percent 



246 MARINE INSURANCE 

deductible franchise, and on account of the incorporation of the 
'* Inchmaree" clause the underwriters were held Uable for the 
many losses resulting from the inexperience of the engineers. 
Accordingly, a new clause was adopted which made the under- 
writers liable for only machinery losses caused by stranding, 
sinking, burning or coUision with another vessel. This clause 
effected an improvement in the experience of underwriters, but 
since losses continued in large amounts the new form contains 
a still more drastic clause reading "Free from particular average 
on machinery and everything connected therewith unless caused 
by stranding, sinking, burning or collision and from aU siLch 
claims there shall be deducted ten percerU of the validation herein of 
machinery. '' 

The Future of Auxiliary Vessels. — ^Whether or not this new 
form will put the underwriting of these vessels on a paying basis 
remains to be seen. It is, however, quite probable that until a 
body of engineers is trained in the operation and care of these 
engines heavy losses will occur. The placing of a considerable 
share of the burden of such damage on the owners will however do 
much in speeding up the training of men in the intricacies of 
these very delicate machines. This type of vessel can serve a 
very useful purpose in the World's commerce and while imder- 
writers as usual are interested in the development of new vessel 
types, they can hardly be expected to shoulder the burden of 
paying for the experience necessary to perfect them. Under- 
writers in the past have done much to bring vessels to the high 
standards which now prevail, because of their unwillingness to 
assume risks on those which were not properly constructed and 
equipped for the employment to which they were assigned. So 
in this case, severe poUcy conditions will give added impetus to 
the perfecting of the motor and of the skill of men operating 
the engines. 

Builder's Risks. — Marine imderwriters in recent years have 
undertaken a new branch of insurance, that of builders' risks. 
This form of insurance while based on the old form of policy is 
so very different in the protection given that a special form of 
policy has been designed in order to furnish the kind of insurance 
desired by builders. It will be observed that up to the point 
where a new vessel is actually launched, there is really no marine 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 247 

hazard. The protection afforded prior to that time is purely 
a shore cover, except in so far as materials designed for the vessel 
may be afloat on barges or other craft at the builders' yards 
or in transit to the shipyard. In the builders' risk form of 
policy in present use, designed to overcome abuses which entered 
into the writing of this class of insurance, the underwriter 
attaches his risk from the date of the laying of the keel of the 
vessel. Premium is charged from that date on the total amount 
for which he would be Uable, should the vessel become a total 
loss after completion, but before deUvery. (See Appendix p. 380.) 
Special Hazards Insured Against. — In addition to the 
perils set forth in the ordinary form of marine insurance policy 
the underwriters on a builders' risk policy also assume liability 
for the risks set forth in the following clause: 

"This insurance is also to cover all risks, including fire, while under 
construction and/or fitting out, including materials in buildings, work- 
shops, yards and docks of the assured, or on quays, pontoons, craft, 
etc., and all risks while in transit to and from the works and/or the 
vessel wherever she may be lying, also all risks of loss or damage through 
collapse of supports or ways from any cause whatever, and all risks of 
launching and breakage of the ways." 

The foregoing clause outlines the protection afforded up to the 
point of the vessel taking the water. The underwriter further 
obligates himself, in the case of failure to launch, to bear all 
subsequent expenses incurred in completing the launching. 
It occasionally happens that through some miscalculation in the 
construction of the ways or through some mishap to them, caused 
frequently by their sinking due to an insecure foundation, that 
a vessel will fail to slide into the water causing serious damage 
not only to ship itself but to the ways. There is great danger 
that in failure to launch, the whole structure of the ship will be 
strained. The expense of completing the launch and repairing 
the ways and the ship is at the risk of the builders' risk under- 
writers. 

Risks after Launching. — The vessel having been successfully 
laimched, the underwriter continues on the risk and assumes 
liability for all damage during the trial trips and all hazards 
while proceeding to and returning from the trial course. The 



248 MARINE INSURANCE 

policy contains the full four-fourths collision clause, and with 
respect to average, agrees to pay all losses irrespective of per- 
centage without the deduction of thirds whether the average 
be particular or general. In the case of government vessels, 
liberty is granted for the testing of the guns and torpedoes of 
the warship, but in the event of loss or damage to the ship or 
machinery resulting from such test, the underwriter assimies 
no liability therefor, unless the casualty results in the total loss 
of the vessel. In the case of submarines, part of the testing 
consists in the submersion and emersion of the vessel and the 
underwriter is liable for any mishap which may occur during this 
test. Submarines have at times successfully submerged but have 
failed to emerge causing considerable expense in raising the vessel. 

Underwriter Guarantees Integrity of Material. — ^The builders' 
risk form is so broad in the protection afforded that the under- 
writer in reality guarantees the integrity of the materials entering 
into the construction of the vessel. If on the trial trip defects 
become manifest which necessitate overhauHng and additional 
expenses, claim for such loss is responded for by the underwriter. 
For instance, on the trial trip on account of the working of the 
engines a flaw may develop in the bed-plate of the engine neces- 
sitating the stripping of the engine and the placing of a new 
bed-plate. The actual cost of a new bed-plate may in itself 
be small, but the necessary expense involved in the installation 
of the new plate, in some cases results in very heavy claims. 

Special Clauses and Warranties. — In the builders' risk form of 
policy the imderwriter also agrees to cover all damage to hull, 
machinery, apparel or furniture caused by the settling of the 
stocks on which the vessel is being built or f ailmre or breakage of 
shores, blocking or staging, or of hoisting or other gear, either 
before or after laimching and while fitting out. The poUcy also 
contains the "Inchmaree" clause and the Protection and Indem- 
nity clause, not, however, assuming Uability for loss of life or 
personal injury. The collision clause is extended to cover risks 
ordinarily excluded by this clause, that is, responsibility for any 
sum which the assured may become liable to pay, or shall pay for 
removal of obstructions under statutory powers, or for injury to 
harbors, wharves, piers, stages, and similar structures. Owing to 
the very broad protection afforded by the builder's risk form, 



SPECIAL POLICY FORMS FOR INSURANCE OF HULLS 249 

underwriters find it prudent to insert warranties excluding certain 
perils. One of these relieves the underwriters from claims arising 
directly or indirectly imder workmen's compensation or em- 
ployer's liability acts and any other statutory or common law 
liability with respect to accidents to any person or persons 
whatsoever. The free of capture and seizure clause and the 
strikers and locked-out workmen clause are also inserted. In 
order to offset the danger that might ensue to vessels being built 
at yards on the Pacific Coast through earthquake shocks, a 
warranty is inserted freeing the underwriter from loss or damage 
caus^ by earthquakes. While the underwriter is Uable for the 
repair of damages resulting during launching and trial trips, 
yet by warranty he declines to assume liability for any conse- 
quential damage or claims for loss through delay, however 
caused. Formerly, under builders' risks poUcies it was customary 
to insure property while being conveyed from the place of manu- 
facture to the vessel, as in the case of submarine engines built 
on the East Coast for installation in submarines being built 
on the West Coast, but by warranty this risk is now excluded 
from the policy. It must be borne in mind, however, that 
several of these warranties may be waived by the payment of an 
additional premium. 

Return Premiums. — With respect to the question of return 
premium in builders' risks policies, in the event of a vessel 
being completed prior to the expiration of the policy term, 
provision is made for the payment of pro rata return premium for 
the months not commenced upon. The underwriter, however, 
stipulates that in any event, such return premium shall not 
exceed a fixed portion of the total premium. This is necessary 
in view of the great rapidity with which ships are being produced 
at the present time. Were an underwriter to receive only one- 
twelfth of the annual rate for a steel steamer completed in less 
than one month, the business would not, at the low rates pre- 
vailing, develop a sufficient fund of premium with which to pay 
possible losses. It will be observed that in the event of loss 
or claim under this form of poUcy, the underwriter assumes 
liabiUty for only his proportion of the loss, based on the relation 
which the amount insured by his policy bears to the completed 
contract price of the vessel. 



250 MARINE INSURANCE 

Fertile Field for Insurance. — In view of the rapid strides which 
ship-building is making in this country, the builder's risk field 
would seem to ofifer underwriters a fertile field for development. 
At present most of the ship-building is on government account 
and is therefore not insured with private underwriters. However, 
with a return of peaceful conditions this insurance will doubtless 
return to the open market. In fact, measures are now in 
progress looking toward the insurance of government vessels 
on a special form of policy similar to the standard form, except 
with respect to the determination of the premium charge and 
some minor matters in regard to the scope of protection afforded. 
The determination of proper rates of premium for this kind of 
risk is a matter of considerable difficulty, and only by the closest 
inspection of the plants can satisfactory results be obtained. The 
fire hazard in non-fireproof yards is an exceedingly important 
element in the risk, while the general upkeep of the yard and its 
suitability as a site for ship launching are factors of no little 
importance. 



CHAPTER 15 
FREIGHT INSURANCE 

Freight Insurance a Difficult Subject. — ^Freight the third 
great maritime interest, is of all the subjects of marine insurance 
the most difficult to comprehend. Why this should be so, is 
somewhat hard to understand, nevertheless the fact remains 
that in the whole realm of marine insurance more difficult and 
compUcated questions arise in regard to freight than with respect 
to any other single interest. Perhaps a certain part of this 
difficulty arises through a confusion of terms; the word, freight, in 
this country at least, having a double meaning. Freight as 
usually thought of by the lay mind re*fers to goods, to the cargo 
of a vessel or to the contents of a railroad car, and accordingly 
the expression "freight" steamer, or ''freight" car is used, a 
meaning of the word that is quite foreign to the usage in Great 
Britain, where a freight car is referred to as a goods truck. 
Unfortimately for the clear imderstanding of the subject of 
freight as used m shipping transactions and especiaUy in marine 
insurance, there is this common and yet non-technical meaning 
of the word. 

Meaning of Freight in Marine Insurance. — Freight as used in 
marine insurance has an entirely different meaning, having refer- 
ence to the money which is paid to a vessel for the carriage of 
goods or to any common carrier for the transportation of property 
by rail or water. We thus encoimter the expression "freight" 
rate meaning the charge made by a carrier for the transportation 
of goods and merchandise including animals. It must be ob- 
served, however, that the expression freight is not used in connec- 
tion with the money received for the transportation of passengers, 
this being referred to as passage money in the case of water 
carriage over considerable distances and as "fare" in the case of 
short water trips or in railroad transportation. Freight then, as 
used in connection with transportation insurance, may be con- 
sidered as an intangible interest, as a financial benefit derived 

251 



252 MARINE INSURANCE 

through the employment of vessels or transportation lines in the 
carriage of property. The fact that the interest is an intangible 
one, arising merely because of the existence of a paper contract 
which establishes a certain relation between the owner or the 
charterer of a vessel and the owner of property offered for trans- 
portation by that vessel, no doubt adds somewhat to the difficulty 
of understanding the subject. The forms of contract differ so 
widely, the time of payment of the freight money varies so 
much and the duties and obligations of the two parties to the 
contract are so involved, in many agreements, as to cause situa- 
tions to arise which are complicated and difficult of explanation. 
The insurable interest in freight, depending on the terms of the 
contract of carriage and the terms of the contract of the sale of 
the goods themselves, causes this subject to be wrapped up in all 
the complications and mystery which surround an intangible 
interest. 

Vessels Built to Earn Freight. — Vessels are built for the purpose 
of earning freight and their value lies solely in their ability to 
accomplish this end. This statement refers to merchant vessels 
built, owned, and operated by private enterprise and does not of 
course refer to the vast amount of tonnage recently constructed 
and now being built with an immediate purpose which looked solely 
to the successful prosecution of the war. These vessels, however, 
if they are sold to private owners will be purchased at a price 
which the buyer will feel represents the earning value of the 
vessel as a cargo carrier for hire. The value of a vessel is roughly 
the sum total of the freight, which can be earned during its 
normal life, say twenty years, less the cost of earning that freight 
and the cost of unkeep, plus the break-up value of the vessel as 
scrap at the end of its earning period. This fact caused it to be 
argued that there is no insurable interest in freight and that the 
insurance on the hull carries with it the insurance of the im- 
mediate and prospective earnings of the vessel. 

When is Freight Earned? — Under the original form of freight 
contract, the vessel is entitled to no compensation under a freight 
agreement, unless and until it has fully and precisely fulfilled 
the contract of carriage, notwithstanding the fact that the non- 
fulfillment of the contract has resulted through causes beyond 
the control of the owner or charterer of the ship or his agent, the 



FREIGHT INSURANCE 263 

captain of the vessel. Thus under the common law of England 
were a vessel owner to contract to carry a parcel of goods from 
Liverpool to Shanghai for a named smn of money, and through 
causes beyond the control of the owner or captain, the vessel 
were compelled to enter the port of Hong Kong and there end the 
voyage and there discharge and make deUvery of the goods, the 
owner of the goods would be reUeved from paying the freight 
stipulated in the contract or any part thereof, because the owner 
of the vessel, the other party to the contract, has not fulfilled 
the terms of the agreement. It will be observed that in such a 
case the owner of the vessel has incurred almost all the expense 
necessary to completely fulfill his agreement and these expenses of 
fuel, food, wages, etc. must be paid notwithstanding the fact that 
under the circumstances he will receive nothing in return and will 
in addition lose his profit, that is the net freight. This net freight 
is the only freight that can be considered in making up the value 
of the vessel itself, and were the theory that there is no insurable 
interest in freight put into actual practice the owner would have 
no means of protecting himself against the loss of expenses in- 
curred in the event of the freight not being earned. Of course, 
in the pase just cited if the vessel could not proceed beyond Hong 
Kong the captain would endeavor to arrange for the forwarding 
of the cargo by other conveyances to Shanghai and thus earn 
the freight. The expenses incurred in so forwarding the cargo 
would result in a loss to the vessel owner or charterer recover- 
able under a poUcy on freight provided the cause of the vessel's 
entering Hong Kong in distress was a peril insured against. 

Freight "Pro-rata Itineris Peracti." — The rule in most 
European countries other than Great Britain is less stringent 
than that outlined above. Freight pro-rata itineris peracti, 
that is an allowance of freight for the part of the contract per- 
formed, is granted to the vessel owner or charterer, if the com- 
plete fulfillment of the contract is prevented by causes over which 
he has no control. In the United States the EngUsh practice 
has been closely followed. Nothing short of exact compUance 
with the terms of the freight agreement is considered a fulfill- 
ment of the contract entitUng the vessel owner to compensation. 
It does not follow, however, that an express agreement may not 
be made by the cargo owner to receive his cargo at a point short of 

18 



254 MARINE INSURANCE 

destination upon payment to the vessel owner of an agreed 
amount of freight for the part of the voyage ahready completed. 
This is often done in order to obtain prompt possession of the 
property since the vessel owner has the right to retain possession 
of the goods for a reasonable length of time, if he considers that 
he will be able to forward them to destination and thus earn his 
freight. This right of the vessel owner to retain possession of 
the goods is a logical one, as otherwise the cargo owner in the 
event of delay through marine peril or otherwise, could step in 
and demand possession of the property, thus preventing the 
vessel owner from earning his freight. If the cargo owner is 
unwilUng to await the arrival of the vessel at destination, or 
the forwarding by the vessel owner of the goods on some 
other conveyance, he may by payment of full freight or by 
payment of pro-rata freight, if the amount of this can be de- 
termined amicably, usually obtain immediate possession of the 
property. 

I^epaid and Guaranteed Freight. — ^Again it must not be pre- 
siuned, from this statement of the basic rule in regard to the 
earning of freight, that it is not possible for the vessel owner to 
make a freight contract by which he secures payment of the 
freight whether or not the voyage is fully performed. On the 
contrary, many freight contracts provide for prepaid freight or 
guaranteed freight, that is payment of the freight even if the 
goods are not deUvered according to the terms of the contract, 
such non-delivery resulting from causes beyond the control of the 
vessel owner. If the freight is merely prepaid without any stipu- 
lation in the contract that the prepayment is to be retained 
whether the voyage is successfully completed or not, the prepaid 
freight must be returned if the voyage is not completed in ac- 
cordance with the terms of the agreement of carriage. If the 
freight is prepaid absolutely or is guaranteed, which amounts to 
the same thing, it will be observed that the vessel owner has no 
freight at risk during the voyage as he either has the freight in 
hand or has a contract under which the freight will be forthcoming 
whether or not the voyage is completed. The money paid or to 
be paid in such cases for the carriage of goods has thus lost its 
identity as freight and while it may be insured by the cargo 
owner under the name of freight, it has in reality become 



FREIGHT INSURANCE 255 

part of the value of the goods and may rightly, if the cargo 
owner so elects, be included as part of such value, and insured 
as goods. 

Prepaid Freight Wrong in Principle. — Contracts calling for 
the prepayment or the guaranteeing of freight are wrong in 
principle, and become possible when a situation exists in the ton- 
nage market where the demand greatly exceeds the supply. In 
such event the steamship owner or agent in a measure has the 
cargo owner at his mercy and can demand terms of payment, 
which would not be tolerated in a competitive market. The 
owner of a vessel is by the common law obUgated to deUver cargo 
which he receives under a contract of carriage at the destination 
named iil the condition received, the acts of God and of the Kings' 
Enemies alone excepted. While this basic law has been greatly 
modified by statute, in that vessel owners have been reUeved of 
many of the obUgations formerly imposed upon them, the law 
has not, in the absence of express agreement, relieved owners 
from the primary duty of perf ormmg the contract of carriage to 
the letter. While the prepayment of freight in no wise relieves 
owners from the duty of impUcitly performing the contract, the 
fact that the freight money is in hand or guaranteed removes the 
chief incentive to the diUgent prosecution of the voyage, and 
makes the owner less likely in the event of disaster to use all 
possible efforts to carry the cargo forward to destination. Plaus- 
ible excuse will be offered as to the impracticability of taking 
measures to forward cargo to destination, which measures, if 
the payment of the freight were dependent thereon, would seem 
the obvious course to pursue. 

Interesting Underwriting Problems. — The insurance of freight 
presents some very interesting underwriting problems owing to 
the fact that certain hazards in connection with the interest may 
be at the risk of one party to the contract of carriage while others 
are at the risk of the other party. Reference has already been 
made in an earlier chapter to charter parties and bills of lading. 
The relations established by these two forms of agreement as 
a rule determine the conditions with which freight insurance has 
to deal, and as the forms of these agreements are many, so the 
conditions involved in freight insurance are many. Were it 
possible in each case of freight insurance to scrutinize the terms 



256 MARINE INSURANCE 

of the freight agreement, much of the diflSculty experienced in 
the insuring of freight would be eliminated. 

Charter Parties. — Under the charter party, the owner of a 
vessel hires it to a ship operator or to a merchant for a definite 
period of time or for a specific voyage, payment for the use of 
such vessel being stipulated in the agreement. The owner may 
turn the vessel over to the charterer, the latter agreeing to oper- 
ate it, to insure it and at the end of the specified voyage or time to 
return it to the owner in the same condition in which he received 
it. A fixed price per day may be agreed upon for the use of the 
vessel, payment to be made monthly. It is usually stipulated 
that if the vessel be lost or disabled so as to be imfit for service, 
the per diem payment is to cease from the time the vessel is lost 
or during the period it is disabled. Under this state of facts the 
vessel owner is not at all concerned in the success of the charterer 
in being able to obtain freight engagements for the vessel, except 
in so far as such inability may result in the financial embarrass- 
ment of the charterer, but he is greatly concerned in the continued 
existence of the vessel in a navigable condition. This is not 
because loss or damage to the hull will affect him, this contingency 
by the terms of the agreement being at the risk of the charterer, 
but because the disabling of the vessel will cause the payment of 
the charter money to cease. The owner of the vessel, therefore, 
has an insurable interest in the charter money called for by the 
terms of the contract against loss through the occurrence of the 
perils which will cause these payments to cease. 

Charter Money. — The forms of charter parties are various 
calling for the chartering of the vessel on any one of a number of 
methods of operation and stipulating for the payment of the 
charter money in various ways. This is the name by which 
freight is known when the payment is made for the use of an entire 
vessel or a part thereof under a charter party form of agreement. 
Charter money may be paid by the day, month or year, by the 
trip or round voyage, or it may be based on a unit of measiu*e as 
so many dollars per ton or per bale. In any event if the owner 
hires his vessel under charter party, this agreement fixes the 
respective liabilities of the two parties with regard to the vessel 
itself and its earnings, the freight or charter money. In many 
cases the owner will charter his vessel to a merchant who has a 



FREIGHT INSURANCE 257 

quantity of goods to ship sufficient to furnish a full cargo for the 
ship. In such case the sole duty of the cargo owner is to furnish 
the cargo, the vessel owner attending to the stowage and carriage 
of the goods and in the absence of special agreement to the con- 
trary, receiving his compensation at the stipulated rate on the 
right deUvery of the cargo at the destination named. 

Bill of Lading Freight. — Where a vessel is put on the berth to 
load general cargo for any merchant who may offer cargo for the 
intended port of destination, the second form of freight agree- 
ment, the bill of lading, comes into use. The bill of lading is the 
vessel's receipt for goods delivered to it to be transported to the 
destination named therein, in accordance with the terms and 
conditions thereof, at the rate of freight stipulated. The sum 
total of all the bill of lading freight is the total gross earnings of 
the vessel for the contemplated trip and is at the risk of and 
therefore insurable by the owner, or charterer, as the case may be, 
because under the ordinary form of bill of lading the freight is not 
due from the cargo owners until the goods are delivered at des- 
tination. The owner or charterer of the vessel however has a 
lien on the goods and may retain possession thereof until such 
payment is made. 'Insm*ance placed on bill of lading freight is 
usually valued at freight list. 

Delivery of Cargo in Specie. — At this point it will be proper 
to explain that under common law as amended by statute and 
under the ordinary form of bill of lading, while it is required that 
the owner or charterer deUver cargo at destination in order to 
earn freight, it is only required that such deHvery be made in 
specie. That is, the owner or charterer is deemed to have ful- 
filled his agreement, if he delivers the same goods that he re- 
ceived, regardless of the fact that they may have been severely 
damaged through causes beyond his control. If, however, the 
goods are not deUvered in the form in which they were received 
the owner or charterer is in exactly the same position with respect 
to payment as if delivery had not been made. Thus if cement is 
shipped, but through the entrance of water into the hold it 
arrives as stone, dehvery cannot be made in specie and the cargo 
owner will not be required to pay the freight. It is true, however, 
that when goods are received in a damaged state caused by condi- 
tions for which the owner or charterer is not liable, the consignee 



258 MARINE INSURANCE 

may be compelled to pay full freight. The vessel has in all 
cases a lien on the cargo for the amount of freight thereon. 
This calls attention to the fact that there are certain hazards 
in connection with freight that are at the risk of the cargo 
owner. 

Collectible Freight or Freight Contingency. — This risk on 
freight for which the cargo owner is Uable is insured under the 
name of collectible freight or freight contingency. The risk as- 
sumed by the underwriter is comparatively small. If the goods 
are damaged during the course of the voyage, it does not neces- 
sarily follow that there will be a claim under the contingency 
freight insurance as the vessel may never arrive or on arrival the 
damaged goods may have changed in specie, thus reUeving the 
cargo owner from any freight payment. If the goods are landed 
in specie, however, the freight is due. The cost of the goods is 
increased by the amount of freight so paid. It is on this basis 
that claim under such freight insurance is made. That is, to the 
insured value of the goods is added the insured value of the freight 
contingency, and the percentage of loss suffered by the goods as 
determined by a comparison of the soimd and damaged values of 
the property is appUed to this combined insured value and settle- 
ment made accordingly. Freight contingency or collectible 
freight is usually insured in the same policy as the goods them- 
selves, the rate charged on the freight being, however, but a frac- 
tion, usually one-third of the rate on the goods in view of the few 
hazards to which this interest is exposed. The use of the words 
"collectible freight*' in relation to the cargo owner should not be 
confused with the same expression when used to describe the 
interest of the vessel owner or charterer in bill of lading freight 
payable at destination. Owing to the double use of this expres- 
sion it is preferable to refer to this bill of lading freight as "freight 
contingency" when considered from the point of view of the cargo 
owner. 

Various Freight Interests in a Single Venture. — It will thus be 
seen that many freight interests may be involved in a single 
venture. In the case of a boat chartered on time and put on the 
berth by the charterer, the owner will have an insurable interest 
in the charter money if its payment is contingent on the continued 
existence of the vessel; the charterer will have an insurable 



FREIGHT INSURANCE 259 

interest in the bill of lading freight for the immediate voyage, if 
collect, while the cargo owner will have an insm-able interest 
in the freight contingency. If the charterer has rechartered to 
another party who in turn puts the vessel on the berth, the original 
charterer may have an insurable interest in profits on charter, 
that is the difference between the amount he will have to pay the 
owner and the amount to be paid to him by the party to whom he 
has rechartered the vessel. These cases merely present some of 
the more common and apparent freight interests. 

Freight a Contingent Interest. Dead Freight. — In principle 
the insurance of freight differs not at all from the insurance of 
hull or cargo. The interest is intangible being based merely on a 
contractual relation, but the perils to which the interest is exposed 
are precisely the same perils to which hull and cargo are exposed. 
The earning of the freight in most cases is dependent on the 
continued existence of the cargo and the successful prosecution 
of the voyage by the vessel. In this connection mention may be 
made of what is known as "dead freight. '' It may happen that 
after a merchant has engaged space in a vessel the goods which 
he intended to ship are destroyed or he is for some other reason 
prevented from making the intended shipment. He may be 
able to substitute other goods, but if he cannot do this and the 
shipowner cannot obtain other cargo to fill the space in question, 
the merchant may have to pay for the space for which he con- 
tracted although the vessel sails with the space unused. The 
freight paid for unused space is called "dead freight." It 
may be that the shipowner can obtain cargo for the whole or 
part of the space engaged, but at a lower rate than the merchant 
was to pay, in which event the difference between the contract 
price and the freight received for the substituted cargo wiU have 
to be paid by the merchant. It is the shipowner's duty, of course, 
to use reasonable diligence to fill dead cargo space and thus 
reduce the amount to be paid by the merchant. Dead freight 
is not an insm'able interest, as the loss of the merchant is deter- 
mined prior to the inception of the voyage, while the right of the 
shipowner to the dead freight is in no way contingent on the 
successful performance of the voyage. 

When Does Insurable Interest Commence? — The risks to 
which the interest of freight are exposed being the ordinary 



260 MARINE INSURANCE 

marine perils covered by a marine insurance policy, the principal 
difficulty is to precisely define the insurable interest and the 
particular contingencies which are at the risk of the person 
desiring the insurance as shown by the contract of affreightment. 
To have an insurable interest in freight there must be a definite 
contract of employment for immediate or future execution. In 
the ordinary case of shipowners' freight, the payment of which 
is contingent on the successful execution of the freight agreement, 
the insurable interest commences when the ship is ready to 
receive the cargo or sails in ballast for the loading port. Thus 
if a vessel under contract to carry a cargo of cement from Newport 
News to a River Plate Port for which it is to receive say S20,000, 
on the right deUvery of the cargo at destination, saHs from New 
York to Newport News in ballast, the owner has an insurable 
interest to the extent of $20,000 in the freight to be earned on 
the trip from Newport News to River Plate. If disaster over- 
takes the vessel between New York and Newport News, and the 
vessel is lost or so injured that the contemplated trip must be 
abandoned there will be a total loss of the freight. If the cement 
is loaded and the vessel proceeds on her journey, but through 
perils insured against part of the cargo is so damaged that delivery 
of this part cannot be made, then there will be a total loss of 
part of the freight, representing that portion of the freight appli- 
cable to the damaged cargo. If on the other hand, owing to stress 
of weather, a sacrifice of part of the cargo is necessary for the 
safety of the entire venture and a portion of the cement is jetti- 
soned, thereby entailing the loss of the freight on this portion of 
the cargo, a general average loss on freight will have occurred, and 
all the interests saved will contribute to the freight lost, while 
the freight earned on the saved cargo will bear its share of the 
contribution. 

Future Freights. — Future freights may be insured, provided 
there is a definite contract of affreightment. For instance, in 
the case cited in the preceding paragraph, the vessel owner might 
have a definite contract to carry a full cargo of wool from the 
River Plate to Boston, a lump sum freight of $30,000 to be paid 
on right delivery of the wool at Boston. The owner can insure 
this freight on the trip from New York via Newport News to 
River Plate, because his interest in this return freight is not a 



FREIGHT INSURANCE 261 

speculative interest, but a definite one arising out of a valid 
contract, the execution of which is merely dependent on the 
continued existence of the vessel. The mere knowledge or 
expectation on the part of the vessel owner that he would obtain a 
wool charter on arrival at the River Plate would not give him 
an insurable interest in the freight which he might earn if such 
a contract were made. If, however, while the vessel was on the 
way from Newport News to the River Plate such a contract 
should be consunmiated for the return trip, then the insurable 
interest in the freight to be earned on the return trip would arise 
immediately. It is important when insuring the freight to be 
earned on future trips that the interest which is being insured 
be definitely described. 

Anticipated Freight. — In the case cited above where the vessel 
sailed from Newport News without definite freight engagement 
after arrival at the River Plate, but with a reasonable expectation 
of obtaining a charter, the owner is not absolutely precluded 
from insuring his expectation. This is commonly done under 
the name of anticipated freight, the insurance obtained in the 
ordinary case being against total and constructive total loss only. 
Obviously, there being no definite insurable interest which can be 
proved by the production of a contract of affreightment, such 
insurance is effected policy proof of interest, full interest admitted, 
the poUcy being an honor document, payable by the underwriter 
on the production of proof of the loss of the vessel. It is evident 
that such insurance is open to gross abuses and may, in fact, be 
used as a cloak for a mere gamble. For this reason, as already 
indicated in the discussion of hull insurance, many hull poUcies 
contain a warranty that the amount placed on P.P.I.F.I.A. 
form shall be hmited to a fixed percentage of the insured value 
of the vessel. 

On Board or Not on Board. — The expression freight "on board 
or not on board*' is frequently foimd in freight policies. The 
intent of this clause is not always clear as it is evident that 
freight being an intangible interest cannot be on board the 
vessel. The goods for the carriage of which the freight is to be 
paid may or may not be on board in the case of chartered freight 
as was indicated in the above-described case of the vessel sailing 
in ballast from New York to Newport News to load cement; It 



262 MARINE INSURANCE 

will be recalled that the skeleton form of policy reads ''beginning 
the adventure upon the said goods and merchandises from and 
immediately following the loading thereof on board the said 
vessel, etc.," and while this expression could not be held to refer 
to freight it may be that the expression ' ' on board or not on board' ' 
is inserted to avoid the possible impUcation that the goods to 
which the freight relates must be on board before the risk will 
attach. This expression is also used in connection with insur- 
ances on freight for a long round voyage, during which cargo will 
be loaded and discharged at way ports. The exact amount of 
freight at risk in such cases cannot be definitely determined, but 
if the vessel owner wishes a valued policy covering, this freight, 
rather than insurance on P.P.I, conditions he will place the risk 
"on board or not on board." 

Chartered or as If Chartered. — Coupled with this expression 
the words "chartered or as if chartered" will be found or these 
latter words may be used alone. The meaning of this expression 
is exceedingly doubtful, several decisions having been rendered 
on these words without shedding much light on their meaning. 
It would seem that the expression is meaningless where the freight 
is actually under charter, but in cases where there is no definite 
charter as where the owner employs his vessel for the carriage 
of his own property, the expression could take on the meaning 
that the freight while not actually chartered freight was to be 
insured under as favorable conditions as would chartered freight. 
In the event of the freight to be earned on a future voyage being 
insured during the present trip, where the contract for the future 
voyage is under agreement but has not been reduced to a formal 
charter, the combined expression "freight on board or not on 
board, chartered or as if chartered" would seem to specifically 
provide for both contingencies, i.e., the fact that the goods to 
which the insured freight relates are not yet on board and that 
the formal charter has not yet been signed. The money, which 
the owner of a vessel saves by carrying his own goods can be 
insured as freight in the same manner as freight to be earned for 
the carriage of the property of others. 

Termination of Risk. — A poUcy of insurance on freight con- 
tinues to cover until the contract of affreightment is completed, 
broken up or abandoned. It is not necessary, however, that the 



FREIGHT INSURANCE 263 

protection afiforded be concurrent with the freight contract, but 
may cover only a portion of the intended voyage, if such intention 
is clearly indicated in the policy. Freight may also be insured on 
time. That is, a poUcy may be written to cover the freight at 
risk on a vessel or a fleet of vessels for a definite period of time, 
say one year. The amount at risk at any one time is limited to a 
specific sum and the freight is valued on some definite basis such 
as freight list or amount of charter. Under such a policy in the 
event of loss the amount recoverable will be the proportion of 
the loss which the amount insured bears to the total amount of 
the freight list or of the charter. Under such a policy declara- 
tions of insurance are made as under a floating cargo contract, 
premiimi being charged on the amounts as reported. 

Amount Insured. — The amount insured on freight should be 
limited to the gross amount at risk plus the cost of the insurance. 
No account is taken of the cost of earning the freight to be paid. 
It may happen that under a long time charter the cost of operas- 
tion may vary greatly, so that if freight payments are made 
monthly one month may show a considerable profit, whereas a 
later month may result in an equal amount of loss. Neverthe- 
less, the amount at risk should be constant, or if insured for the 
whole amount of the charter, should be reduced proportionately 
month by month as the freight is earned. Again, a ship operator 
may charter a vessel for a lump sum freight, but on putting the 
vessel on the berth be able to obtain only a part cargo, or obtain- 
ing a full cargo have a total freight Ust aggregating less than the 
amount' paid or to be paid for the charter. Nevertheless, the 
bill of lading is the only freight he has at risk, the loss on 
the charter not in any way being involved in the successful 
prosecution of the voyage. 

Duty Insurance. — There is another intangible subject of in- 
surance, which bears a striking resemblance to collectible freight 
or freight contingency in the scope of the risk to which the interest 
is exposed. This is the duty which is demanded by a govern- 
ment on imports. In some coimtries there is an export duty 
which like prepaid or guaranteed freight becomes part of the 
value of the goods and may be insured as such. Import duties, 
however, are pecuUar to countries having a protective tariff and 
are collected only on goods actually received into the country, 



264 MARINE INSURANCE 

whether such goods are in sound or damaged condition when re- 
ceived. Duty insurance is confined in large measure to imports 
into the United States which are subject to the tariflf. On such 
goods the government demands duty at the rate provided in the 
tariflf and makes no allowance for depreciation due to damage, 
unless a package is deUvered empty or is so damaged as not to be 
worth the duty to be paid and is abandoned. In certain cases of 
loss, refund of duty is allowed, but such exceptions are rare. It will 
be apparent, therefore, that if a case of goods arrives in a damaged 
condition and full duty is paid, the loss on the goods is not only 
the depreciation on the invoice value but the same depreciation 
on the increased cost involved in the payment of the duty, the 
value of the article being judged in the American market on 
the basis of duty paid commodities. Thus in determining the 
percentage of loss the gross sound and damaged values are com- 
pared. This percentage is appUed by the underwriter to the 
insured value. If the duty is insured, its insured value will be 
added to the insured value of the goods and the percentage of 
loss applied to the combined amount. If on the other hand the 
duty is not insured, the percentage will apply only to the insured 
value of the goods, the loss on the duty paid being entirely at the 
risk of the assured. As in the case of freight contingency, there 
being no risk on freight until the goods arrive, the rate of premiiun 
charged on the amount of duty is low; usually one-third of the 
rate on the goods. 

Premium is Due Even if Duty Not Paid. — Merchants, who 
are very conscientious in reporting shipments appUcableto float- 
ing policies, sometimes fail to report duties or collectible freight 
on shipments insured under such poUcies in cases where the vessel 
is lost at sea, or where goods are destroyed before being laden on 
the vessel, on the theory that while in such cases the imderwriter 
may be Uable for the loss, the question of duty or collectible 
freight is not involved. When it is considered, however, that a 
risk having once attached the underwriter is entitled to aU the 
premium for all the risks that would have been covered if the voy- 
age had been fully completed, the right of the underwriter to 
premium on duty and collectible freight in the cases cited will 
be apparent. In some cases underwriters agree to make adjust- 
ments, including the amount of duty paid, without requiring 



FREIGHT INSURANCE 265 

that separate reports of duty be made, and separate premiums 
paid. Nevertheless, in such cases the assured pays premium 
for the risk involved in insuring the duty either by an increase 
of rate on the goods, or by increasing the advance on the basic 
value thus producing a larger amount against which the cargo 
rate is assessed. 



CHAPTER 16 
WAR INSURANCE 

War Insurance an Important Feature. — War insurance during 
the World Conflict assumed a dominating position in the marine 
insiu'ance market. Not only was this so from the viewpoint of 
the volume of business written, but also from the interest which 
was directed to the field of marine insurance solely because the 
insuring of war perils on the seas early became one of the fore- 
most essentials in connection with the successful prosecution of 
the war. Up to the outbreak of the World War marine insurance 
meant little to the general pubhc, but with the sinking of vessels 
and the destruction of valuable cargoes it was realized that there 
was a profession organized and ready to assume and distribute the 
burden of these imusual losses. While the business of marine 
underwriting was well organized in the matter of insuring marine 
hazards, the tremendous values at risk and the unusual hazards 
to which maritime ventures were suddenly exposed, temporarily 
disorganized the insurance market. 

Little Knowledge of War Insurance. — That this should have 
been the case is not altogether surprising in view of the fact that 
for almost forty years commercial activity had pursued the 
even tenor of its ways, slightly disturbed now and then by rumors 
of wars, or even by actual wars which were more or less localized 
and did not involve world powers whose navies ranked high in 
the scale of size or efficiency. The Spanish- American War, the 
Boer War, the Russo-Japanese War and the wars among the 
Balkan States had in a measure directed underwriting thought 
to the subject of war insurance, but the real effect of these wars 
caused Uttle more than a ripple on the commercial sea. A 
world war between first class powers was considered almost 
impossible, in view of the progress which so-called civiUzation 
had made in the nineteenth century. So the generation of under- 
writers who were experienced in war insurance passed on, and the 
new generation arose firm in the belief that war on a large scale 

266 



WAR INSURANCE 267 

was something with which they would not have to deal. Accord- 
ingly little thought was given to the subject or to the vast 
changes modem invention would make in naval warfare and the 
consequent effect on war underwriting. 

A Great War Thought to be Impossible. — The idea that wars 
of great magnitude were at an end was fiuiiher strengthened by 
the various efforts made during the latter part of the nineteenth 
century and in the beginning of the twentieth, to bring the nations 
of the world together with the object of establishing universal 
peace. Conferences of the nations were held at the Hague, but 
the result of these gatherings showed that all nations were not 
yet ready to submit their differences to an International Court 
of Arbitration. Efforts were therefore made to establish inter- 
national rules of conduct, should war occur, which would safe- 
guard non-combatants, protect peaceful commerce on the high 
seas and in connection with the destruction of belUgerent com- 
merce, at least save life. Accordingly there was proposed 
"The Declaration of London," a code of laws for the conduct of 
naval warfare on the high seas, embodying the well-established 
principles of international law and amplifying such principles 
to bring them more into conformity with the advanced ideas of 
humanity which the Hague Conferences had demonstrated were 
the desires of the larger part of the nations of the World. At the 
outbreak of the World War this Declaration had been ratified 
by most of the powerful nations of the World, and had been ac- 
cepted in principle by some who had not actually ratified it. 
Of course, Uke all international agreements unanimous consent 
was necessary, the will of the majority having no power over that 
of the minority. The Declaration of London was not, therefore, 
an enforceable international code. However, it laid down 
principles so well established by international laws and usage, and 
doctrines so in accord with the dictates of humanity that it was 
fair to assume that the spirit of the code would be observed in 
the conduct of maritime warfare. 

Perils Judged by International Law. — ^Having had little 
practical experience in the underwriting of war insurance, it was 
reasonable for underwriters to assume that the hazards against 
which they would be called upon to furnish protection, were 
those which would occur in connection with naval warfare 




268 MARINE INSURANCE 

conducted in accordance with this and other codes such as the 
Declaration of Paris and in accordance with the proposals 
offered for acceptance at the Hague Conferences. In general, 
therefore, it was assimied that the conduct of war on the high 
seas would follow international law, and that underwriting based 
on such law would produce results satisfactory to both assured 
and underwriter. How far maritime warfare departed from these 
international rules is now well known, but imderwriters early 
in the war fell into the common error that the war was being 
fought between civilized nations. Changes were made so quickly 
in the rules of warfare that imderwriters were kept on the alert 
in order to make the conditions of their policies conform to the 
rapidly changing conditions of naval warfare. 

Principles of War and Marine Insurance the Same. — The 
principles applying to war insurance are the same as those 
applying to insiu*ance against ordinary marine perils, the dif- 
ference being in the peril causing the loss and not in the funda- 
mental principles governing the protection afforded against such 
loss. As previously pointed out marine poUcies in their original 
form cover against war perils, but by the insertion of the War 
Clause or the "Free of Capture and Seizure" Clause as it is 
commonly known, these perils are excluded from the protection 
of the policy. In its ordinary form this clause reads: 

"Warranted free of capture, seizure, arrest, restraint, or detainment, 
and the consequences thereof or of any attempt thereat (piracy ex- 
cepted), and also from all consequences of hostilities or warlike opera- 
tions whether before or after declaration of war." 

If it be desired to cover the risks of war the above clause is deleted, 
or a new one is endorsed on the policy waiving the above clause. 
If it be desired to insure only war perils and not marine risks, 
a clause is endorsed on the policy stating that the policy covers 
only the risks excluded by the Free of Capture and Seizure Clause 
in the marine poUcy. 

- Perils Insured Against* — ^This is of course but one method of 
amending the ordinary policy to include war risks or to cover 
war risks only. Sometimes a special clause is endorsed reciting 
in detail the perils of war assumed by the underwriter. This 
clause usually reads: 



WAR INSURANCE 269 

**It is agreed that this insurance includes (or, covers only, as the case 
may be) the risk of capture, seizure or destruction or damage by men- 
of-war, by letters of mart, by takings at sea, arrests, restraints, detain- 
ments and acts of kings, princes and people authorized by and in 
prosecution of hostilities between belligerent nations; but excluding 
claims for delay, deterioration and for loss of market and warranted 
not to abandon in case of capture, seizure or detention, until after con- 
demnation of the property insured, nor until sixty days after notice of 
said condemnation is given to this Company. Also warranted not to 
abandon in case of blockade and free from any claim for loss or expense 
in consequence thereof or of any attempt to evade blockade; but in the 
event of blockade to be at liberty to proceed to an open port and there 
end the voyage. Foregoing does not cover any war risk on shore." 

The Declaratioii of London. — With this clause in mind it will 
be interesting to turn to the Declaration of London and note a few 
features of international law relating to the conduct of war on the 
high seas. As this Declaration had for its primary purpose 
the definition of that portion of International Law relating to 
cases which would come before a prize court for adjudication, it 
will give a fairly lucid idea of the principles upon which under- 
writers felt they could rely in determining the hazards assumed 
when covering the risks of war. 

Blockade in Time of War. — The first subject treated in the 
Declaration is "Blockade in Time of War." Immediately on 
the opening of hostilities in the recent war, the Allied nations 
endeavored to enforce a blockade against the Teutonic Powers. 
Under the earlier Declaration of Paris certain rules were laid 
down for the conduct of a blockade and these rules were in- 
corporated in the new Declaration of London. Accordingly 
it was held necessary that a blockade in order to be binding 
must be effective, that is, it must be sufficiently maintained 
to really prevent access to the enemy coastline. The n^ere 
temporary raising of the blockade because of stress of weather 
would not invaUdate it, and unless appUed impartially to the 
ships of all neutral nations the blockade would not be vaUd. 
The mere establishment of the blockade, however, would not 
make it effective, unless it were properly proclaimed to the 
world, specifying when the blockade would begin, its geographical 
limits and the period during which neutral vessels caught within 

10 



270 MARINE INSURANCE 

the limits of the blockade might come out. Whether or not a 
neutral vessel may be captured for breach of blockade depends 
on her knowledge, actual or presumptive of the blockade, but 
it will be assumed that such knowledge was had if the vessel 
left a neutral port subsequent to the notification of the blockade 
having been received by the Power to which such port belongs. 
It is further ruled that the blockading forces must not bar access 
to neutral ports or coasts. Regardless of the question of ultimate 
destination of a vessel or of her cargo, it is laid down that she 
cannot be captured for breach of blockade, if at the moment, 
she is on her way to a non-blockaded port. Under the Declara- 
tion a vessel found guilty of breach of blockade is liable to con- 
demnation. The cargo is also condemned unless it is proved 
that, at the time the goods were shipped, the shipper neither knew 
nor could have known of the intention to break the blockade. 

Contraband of War. — The second chapter of the Declaration of 
London refers to the subject of Contraband of War. The word 
contraband is derived from the original warnings served by 
belligerents on neutrals in early wars to the effect that certain 
trades were contrary to their ban or edict. Under the heading 
of contraband in the Declaration there are given three lists of 
articles, the first of which can, without notice, be treated as 
absolute contraband. These articles are such as are directly 
used in the offensive or defensive operations of warfare. It is 
also provided that other articles exclusively used for war may be 
added to the list of absolute contraband by a declaration which 
must be proclaimed to all nations. The second list is composed 
of articles which, while capable of being used in war, are also 
useful for the purposes of peace. These, without notice, may be 
treated as contraband under the name of conditional contraband. 
As in the case of absolute contraband, articles may be added to 
the list of conditional contraband if they are of the same character 
as the enumerated articles, upon due notice being given to other 
nations. It is provided in the third list that the articles therein 
enumerated may not be declared contraband because these 
articles are not presiuned to be useful in war. In view of the 
devices of warfare developed in the recent conflict, in the line of 
explosives, ammunition and offensive weapons, some of the 
articles included in this latter list such as raw cotton, used in the 



WAR INSURANCE- • 271 

manufacture of gun cotton, silk used in airplane manufacture, 
rubber in the manufacture of shells and in the equipment of 
automobiles, present an anomalous situation. 

Absolute Contraband. — Absolute contraband is liable to 
capture if it can be shown that it is destined to territory belonging 
to or occupied by the enemy or the armed forces of the enemy, it 
being immaterial whether the carriage of such goods is direct or 
necessitates transshipment by land or water. The method of 
proof of such destination is carefully set forth in the Declaration. 
The articles contained in the list of conditional contraband are 
liable to capture only if it can be shown that they are destined for 
the use of the armed forces or of a governmental department of an 
enemy state and provision is made for determining whether or not 
such goods are so destined. Conditional contraband is not liable 
to capture unless it is on board a vessel bound for territory 
belonging to or occupied by the enemy or for the armed forces of 
the enemy and is not to be discharged at an intervening neutral 
port. 

Carriage of Contraband Cause for Condemnation. — A vessel 
carrying absolute or conditional contraband may be captured on 
the high seas and will be condemned if the contraband reckoned 
either by value, weight, volume or freight, forms more than one- 
half the cargo. The contraband itself is liable to condemnation 
and other goods belonging to the owner of the contraband and on 
board the same vessel are also liable to condemnation. In case 
a vessel is encountered on the high seas while unaware of the 
outbreak of hostilities or of the declaration of contraband which 
applies to her cargo, the contraband cannot be condemned except 
on the payment of compensation. The same rule applies if 
the master, knowing of the outbreak of hostiUties or of the 
declaration of contraband, has had no opportunity of discharging 
the contraband. Where a vessel is stopped and contraband found 
but not in sufficient proportion to condemn the ship, it is held 
that she shall be at liberty to proceed if the master is will- 
ing to hand over the contraband to the belligerent ship. The 
captor is at liberty to destroy contraband received under these 
conditions. 

Unneutral Service. — The third chapter of the Declaration 
refers to unneutral service, it being declared that a vessel is 



272 • MARINE INSURANCE 

subject to condemnation^ first, if she is on a voyage undertaken 
with the special purpose of transporting individuals who are 
members of the armed forces of the enemy, or for the purpose of 
transmitting intelligence to the enemy; and second, if knowingly, 
the vessel transports a military detachment of the enemy or 
individuals who in the course of the voyage directly assist the 
operations of the enemy. If the vessel is so used, cargo belong- 
ing to the owner of the vessel is also liable to condemnation. 
Furthermore a neutral vessel will be condemned and will, in a 
general way, receive the same treatment as an enemy merchant- 
man, if she take part directly in hostilities, or is under the orders 
or control of an agent of the enemy government, or is exclusively 
in its employ, or is engaged exclusively in the transport of enemy 
troops, or in the transmission of intelligence in the interest of the 
enemy. 

Destruction of Neutral Prizes. — Chapter four of the Declara- 
tion relates to the destruction of neutral prizes. It is held that a 
neutral vessel which has been captured may not be destroyed by 
the captor, but must be taken into port for the determination of 
all questions concerning the validity of the capture. An excep- 
tion, however, is made in cases where the belligerent warship 
which has made capture of a vessel subject to condemnation 
would endanger herself or would involve in danger, the enter- 
prise in which she was engaged, if she attempted to bring the 
captured vessel into port. Nevertheless, if conditions arise 
which render excusable such destruction all persons on board 
the captured vessel must be placed in safety, and the ship's 
papers preserved in order that the validity of the capture may 
later be determined. The circumstances warranting the destruc- 
tion of a neutral prize before the validity of the capture is deter- 
mined must be of an exceptional nature, otherwise the captor 
must pay compensation to the interested parties, and the ques- 
tion whether or not the capture was valid will not be examined. 
If, on the other hand, the destruction is held to be justifiable, but 
the capture invalid, then the captor must pay compensation to 
the interested parties, id lieu of restitution which cannot be 
made. So the owner of goods which are not subject to condem- 
nation, but which are destroyed with the vessel, is entitled to 
compensation. 



WAR INSURANCE 273 

Transfer of Vessels. Convoy. Right of Search. — Other chap- 
ters follow relating to the transfer of enemy vessels to a neutral 
flag, to the method of determining the enemy character of vessel 
and cargo, and to the rules relating to ships saihng under convoy. 
It is further provided that forcible resistance to the legitimate 
exercise of the right of stoppage, search and capture, involves in 
all cases the condemnation of the vessel. The cargo is treated 
as cargo on an enemy vessel and goods owned by the master or 
owner are treated as enemy goods. If the capture of vessel or 
goods is not upheld by the prize court, or the prize is released 
without judgment being given, the parties interested have the 
right to compensation, unless the captiu'e itself was justifiable. 

International Law Not Observed. — ^The above outlined prin- 
ciples, in general, were those by which underwriters felt that they 
could be governed in the issuance of insm-ance against war perils. 
It was, however, early perceived that the rules observed in earlier 
wars and the rules which had been proposed for the conduct of 
future wars would not be adhered to in this conflict, which 
quickly became worldwide and involved warfare with nations 
who had no respect for solemn treaty obligations and who had no 
reverence for International Law. Accordingly, the AUied nations, 
while striving to adhere to the principles of the Declaration of 
London and of international law in general, were gradually 
forced to give a broad interpretation to those principles, and 
in many cases to abrogate them. That such action did at 
times do violence to the rights of neutral nations, cannot be 
doubted, but that such action was justified considering the issues 
involved in the conflict is now generally admitted. 

Doctrine of Ultimate Destination. Preemption. — Thus under- 
writers soon discovered that the blockade which was being en- 
forced included neutral coasts and because of the long coastline 
Involved, could not really be effective. The doctrine of ultimate 
destination was revived and extended, when it was proved beyond 
doubt that the ports of certain neutral countries were being used 
merely as transhipment points on the route to the enemy. 
Furthermore, it was found that owing to the secret methods used 
by the enemy to bring forward contraband, the search of vessels 
at sea was impracticable. This resulted finally in all vessels 
destined for neutral ports of countries adjacent or contiguous 



274 MARINE INSURANCE 

to enemy territory being taken into Allied ports and there 
searched. This involved serious losses even when it was found 
that no contraband was on board. Furthermore captured 
vessels were exposed to the dangers of navigation in belligerent 
waters protected by mine fields and other war devices. That 
the reason for making these captures was a justifiable one was 
amply demonstrated by the fact that manifests were found to be 
improperly drawn describing packages as containing lawful 
commodities which in reality contained absolute contraband of 
war. Furthermore, the AUied governments exercised the right 
of preemption; that is, articles which were free from capture 
under international law, but which it was clear would give aid or 
comfort to the enemy, were taken by the AlUed governments and 
what they deemed just compensation therefor was made to the 
owners. The lists of contraband articles changed so rapidly 
that it was ahnost impossible for underwriters to foUow them. 

Unforeseen Perils. — On the other hand the Teutonic Allies 
having no ports of their own into which they could bring prizes 
for adjudication, sank neutral vessels on the high seas in absolute 
violation of the rights of neutral nations. While the AlUed 
nations endeavored to ease the bm'den of their search and block- 
ade by making examination of vessels at the port of shipment and 
by the granting of Ucenses for the forwarding of goods, and by 
the approval of shipments consigned in certain ways as to the 
Netherlands Overseas Trust, the Teutonic Allies carried on their 
illegal seiziu*es and sinkings with increasing disrespect for the 
rights of neutrals and with disregard for the rights of enemy non- 
belligerents and neutral citizens respecting safety of life and limb, 
provided for imder international law. Finally with the issuance 
of a decree establishing a so-called "barred zone," and the un- 
restricted destruction of vessels in the submarine campaign 
instituted by the German Government, underwriters found them- 
selves confronted with a situation not hitherto approached in 
any previous war. 

Neutrality Warranties. — In order to obviate some of the diflBi- 
culties which were encountered in the insurance of war perils, 
clauses were devised from time to time varying the protection 
afforded. Neutrality clauses in various forms were drawn up, 
which warranted that during the term of the insurance the prop- 



WAR INSURANCE 276 

erty insured was warranted consigned to American or other 
neutral citizens, firms, or corporations, and that the names and 
addresses of such consignees would be stated in the bill of lading. 
The property was also warranted for consumption in some speci- 
fied neutral country. This warranty served to protect the 
underwriter from claim if deception was being practised in 
regard to the neutraUty of the shipment, the breach of the war- 
ranty voiding the insurance. 

"Free of British Capture " Clause. — ^A clause further restricting 
the liability of underwriters in connection with the right of search 
and capture exercised by the AlUed Governments was, early in 
the war, inserted in many policies covering shipments to neutral 
countries. This warranty came to be the most used. one in 
connection with war insurance and in its common form, reads: 
"Warranted free from any claim arising from capture, seizure, 
arrest, restraints, preemption or detainments by the British 
Government or their Allies. " After the entrance of the United 
States into the war it became customary to add the "United 
States Government" to this clause. Other forms ampUfying 
the meaning of this clause, but having the same general purpose 
were used in connection with war insurance. 

Trading with the Enemy. — Early in the war the AlUes dis- 
covered that citizens of neutral countries, in violation of the 
principles of neutraUty, were giving aid and comfort to the 
enemy in many ways. This led to the promulgation of legisla- 
tion generally known as "Trading with the Enemy'' acts under 
which definition is made of enemies and of what constitutes 
trading with the enemy. Upon the entrance of the United States 
into the war similar legislation was passed by Congress. Under 
the power of these Acts hsts were prepared containing the names 
of persons, firms and corporations domiciled in neutral countries 
who were classed as enemies and subject to treatment as such. 
Vessels owned by such enemies were posted as subject to treat- 
ment as enemy vessels. These lists known as "Proscribed" or 
*'Black" Lists furnished information of neutral subjects or vessels 
which would be treated as enemies by the AUied Governments. 
It was not possible to keep informed of the many changes in such 
lists and accordingly clauses were drawn providing that the 
protection of the policy did not extend to any of the firms, 



276 MARINE INSURANCE 

corporations or individuals coming within the ban of such acts. 
As ahready indicated, clauses of this purport are. still embodied 
in many policies whether marine or war issued in this country. 

Licenses. — Neutral governments, in order that they might be 
able to obtain suppUes for their citizens, entered into arrange- 
ments with the AUied Governments, by which goods consigned to 
certain governmental corporations and warranted for consump- 
tion in such countries, would not be subject to capture, seizure, 
detention or destruction. The most prominent of these corpora- 
tions was the Netherlands Overseas Trust, to whose consignment 
vast quantities of stores entered into Holland unmolested. A 
warranty of consignment to this Trust was inserted in many war 
insurance policies, full war protection being afforded in such 
cases. In connection with certain commodities, licenses were 
granted by the Allied Governments permitting the importation 
into neutral countries of definite quantities of these commodities 
under restrictions set forth in these Ucenses. Full insurance 
against war perils was also granted on goods warranted shipped 
under such Ucenses. 

War and Marine Risks Separately Insured. — While in many 
cases marine pohcies were amended to cover war risks, in a large 
percentage of cases all or a part of the war risk was placed 
separately from the marine insurance. This condition soon led 
to considerable embarrassment in certain cases where it was 
doubtful whether the loss which had overtaken the insured sub- 
ject was due to a marine or to a war peril. Where both war and 
marine insurance were covered in the same policy or with the 
same underwriters in separate poUcies, and the loss was a valid 
claim under either the war or the marine insurance, the only 
doubt being as to which poUcy was liable, the underwriter would 
settle the claim. Where, however, the war and marine insurance 
were placed with different underwriters, each would deny liabiUty. 
Many such cases were carried into the courts, especially in con- 
nection with so-called missing vessels, that is, vessels which sail 
but never arrive at their destination nor from which any tidings 
are received indicating the cause of loss. In such cases there 
had always been a presumption that the loss was due to marine 
perils, but owing to the changed conditions of warfare, to the 
unrestricted use of submarines, and to the orders of the German 



WAR INSURANCE 277 

Government to •'sink without a trace," this presumption in 
large measure disappeared and individual losses were decided 
on their merits. In other cases where the full facts as to the 
cause of loss were known, there was doubt as to whether the 
loss was a marine or war loss, and in some cases it was even 
doubtful whether the loss occurring was one covered by either a 
war or a marine policy. 

Doubtful Losses. — Such a case was that of the Str. Canadia, 
which in the early months of the war was stopped oflf the Butt 
of Lewis by a British cruiser and boarded by an Admiralty officer. 
In order to facilitate examination of cargo, the steamer was 
ordered to Kirkwall. Against the advice of the master of the 
vessel, the Admiralty officer ordered the vessel to proceed over a 
dangerous course in the night, with the result that the vessel 
was run ashore and wrecked. The underwriters on the marine 
policies claimed that this was not a marine loss, the vessel being 
already captured and in charge of the Admiralty. The war 
underwriters, on the other hand, claimed that the. loss was 
due to a marine peril, notwithstanding the fact that an Admiralty 
officer was on board. Eminent counsel gave opinions pro and 
con, some even holding that the loss was not one contemplated 
by the coverage of either poUcy. 

Intermediate Liabilities. Explosion Hazard. — To obviate such 
disputes caused by the placing of war and marine insiLrance with 
different sets of underwriters, clauses were devised by which 
either the marine or the war underwriters agreed in considera- 
tion of additional premium to assume liability for risks which 
might fall between the marine and the war policies. Further- 
more, in connection with the Halifax explosion a grave question 
arose as to whether the resultant losses were due to a marine or 
a war peril or whether explosion of the nature causing the destruc- 
tion in question was covered by either form of policy. Accord- 
ingly marine policies were amended to include the risk of ex- 
plosions not covered by war policies. 

New War Devices. — ^Aside from the breaches or modifications 
of international law, which the belligerents made or introduced 
in the late conflict, the war perils insured against differed Httle 
from those suffered in previous wars. The outstanding difference 
was the world-wide scope of the conffict and the devices used 



278 MARINE INSURANCE 

to destroy enemy commerce. The destruction of ships from 
within and from without was accompUshed in ways and by 
methods that could hardly have been conceived prior to this 
war. Bombs placed in the cargo, attached to clock devices set 
to cause explosion and destruction on the high seas, or to cause 
fire at sea, and bombs attached to the rudders of vessels, which 
by the natural working of the rudder would gradually wind up 
the mechanism which would finally explode the bomb, were but 
typical of the diabolical devices used in the destruction of vessels 
on the high seas. The establishment of mine areas covering 
many square miles and extending into international waters, with 
the possibility that many of the mines would break loose and 
become floating traps for innocent vessels, as well as the removal 
of necessary aids to navigation, all produced conditions, perhaps 
not altogether new in warfare, but at least unprecedented because 
of the extent of such operations. 

Submarines and Commerce Raiders. — ^The two outstanding 
perils which the underwriter was called upon to assume, and which 
were assiuned without any restriction of Uability by clause or 
otherwise, were the destruction of vessels by submarines and by 
commerce raiders. The activities of the submarines have, 
of course, compassed the bulk of the destroyed commerce, 
but the operation of these sea wolves was in a measure limited 
geographically by the physical limitations of the craft themselves, 
whereas the activity of commerce raiders was world-wide. The 
result of this was that the underwriter could form a fairly correct 
estimate of the value of the submarine hazard, whereas the losses 
caused by raiders usually occurred after a period of comparative 
freedom from losses, in sections presumed to be free from bellig- 
erent vessels. 

New and Unusual Hazards. — In addition to the fact that the 
operation of the submarines in the destruction of neutral vessels 
was in a great many instances in direct violation of the rules of 
international law and the dictates of humanity, the use of this 
type of man-of-war produced new and unusual perils to naviga- 
tion. The submarine operating under water a part of the time, 
produced a menace to navigation similar in some respects to a 
submerged derelict, and not a few serious casualties resulted 
through collisions with submerged submarines. Not alone 



WAR INSURANCE 279 

did casualties occur in international waters, but in territorial 
waters. In harbors, vessels collided with submerged submarines 
and instances were reported where a submarine attempted to 
emerge directly beneath a vessel causing serious damage to both 
craft. The nature of the casualty, whether a war or a marine 
peril, in such cases became a question of dispute by underwriters 
with conflicting interests. 

Airplanes. — ^The perils of war for which the underwriter 
assumed responsibiUty were not only on the seas, and under the 
seas, but for the fiist time in naval warfare, above the seas. De- 
struction by airplane or airship became one of the war perils in- 
cluded under the all embracing term "men-of-war." While the 
risk from this cause was not a great hazard compared with that 
due to other causes, the air raids made on the alUed countries were 
not confined to destruction on land but in some cases involved the 
destruction of ships in the harbors of these countries. Here 
again as in the case of the submarine, the hazard was locaUzed 
by the physical lin[iitations of the war machine itself and accord- 
ingly a more correct estimate of the peril involved could be made. 

Government War Bureaus. — Perhaps the most interesting 
development of the recent war, in regard to the subject of war 
insurance, was the entrance of various governments, both bellig- 
erent and neutral, into the field of war underwriting. Consider- 
ing the rapidity with which the war hazard developed and the 
tremendous values which were involved in commercial sea 
ventures, it is not at all surprising that the underwriting market 
should have become demoralized at the commencement of the 
war, creating a situation of widely fluctuating rates, and a condi- 
tion where the large values at risk on extra hazardous routes 
could not be absorbed by the then existing insurance market. 
Private underwriting being conducted for the primary purpose of 
producing a fair return of profit on invested capital, it could not 
be expected that those entrusted with this capital would hazard 
its safety in underwriting, which appeared certain to result in 
loss. The government war insurance schemes were therefore 
welcomed by the underwriting fraternity and their conduct 
was entrusted to some of the ablest underwriters in the various 
countries. Not designed for profit, but for the protection of the 
commerce of each respective country, rates were of secondary 



280 MARINE INSURANCE 

consideration. Notwithstanding temporary fluctuations in the 
private market, the government rates held steady, being increased 
or decreased only after a continuous period of heavy or light losses. 
The result was that at times the rates in the private market would 
fall below the government market, in which event business would 
fall away from the bureaus. In fact, on equal or nearly equal 
rates, merchants and shipowners preferred the private market, 
owing to the more elastic conditions granted, and the absence of 
the red tape inevitable in the conduct of governmental operations. 
However, the large capacity of the government bureaus and their 
willingness to cover risks which could be placed only with great 
diflBiculty in the private market, made the bureaus a vital factor 
in the commercial activity which continued despite the perilous 
conditions surrounding much of the overseas conmierce of the 
world. 



CHAPTER 17 
REINSURANCE 

The Destruction of Large Values. — It has frequently happened 
that the World has been shocked by some great marine casualty, 
such as the destruction of a giant ocean greyhound involving 
perhaps the loss of many Uves, but in any event quickly causing 
the destruction of property valued at several milUons of dollars. 
Or it may be that a short paragraph is noted in the daily papers 
announcing that the Str. — , loaded with 20,000 bales of cotton 
ran ashore on the Coast of Ireland in a fog, that the crew were 
saved, but that the vessel and cargo would be a total loss. The 
loss is estimated at $1,500,000 for the vessel and $6,000,000 for 
the cargo. Gigantic values, surely large enough to cause em- 
barrassment to any but the strongest insurance company. The 
destruction of one of the^e great vessels where no loss of Ufe is 
involved is quickly forgotten by the general pubUc, but after the 
event has become but a memory to the lay mind, the underwriters 
are called upon to indemnify the owners of vessel and cargo for 
the losses suffered. 

Reinsurance. — It may be and it usually is the case that the 
insurance on the vessel itself is widely distributed, but it often 
happens when there is a complete cargo of one commodity as in 
the cotton case cited in the preceding paragraph, that the insur- 
ance on the whole cargo will be placed with two or three insur- 
ance companies. How can these companies stand the strain of 
a heavy loss of one or two miUion dollars in a single venture, with 
the possibiUty but not the probabiUty considering the law of 
averages, of suffering in a single year one or more similar losses? 
As losses should be paid out of earnings and not out of capital 
how can such losses be absorbed without making inroads into 
capital and surplus? The answer to the query is found in the 
word reinsurance which makes possible the issuance of poUcies 
for large amounts and what is still more important, makes cer- 
tain the payment of large losses, if incurred. 

281 



282 MARINE INSURANCE 



The Disttibution of Risks. — When the Str. Titanic struck an 
iceberg and sank, carrying with it scores of helpless human 
beings, and cargo comparatively small in quantity but relatively 
large in value, the marine insurance world was temporarily 
stunned at the magnitude of the disaster, and more so consider- 
ing that the vessel was on her maiden voyage and that the 
insurance on her had not been in force long enough to add any 
considerable siun to the earnings of the underwriters. But with- 
in a few weeks the owners of the vessel were reimbursed for the 
loss, and what had seemed a terrible financial blow had after the 
fiirst shock caused but a ripple on the marine insurance sea. Into 
every corner of the marine insurance world, in Europe, America 
and the Far East, either because of direct insurance or through 
reinsurance the loss was felt and contribution to the indemnity 
was made. 

Growth of Reinsurance. — Reinsurance has increased greatly 
in the last quarter of a century, since the dawn of the new com- 
mercial era of big business. The values at risk in oversea com- 
merce are enormous, and more and more has it come to pass that 
single enterprises will engage the full capacity of a vessel. But 
large enterprises have become large in part by the ehmination 
of unnecessary detail, and the managers of such enterprises have 
been imwilling to accept protection in small amounts widely 
distributed over the underwriting field. They have preferred 
and demanded concentration of protection in a few strong 
companies, leaving the distribution of the heavy risk to the 
underwriters. This has, it is true, relieved the property owner 
of the detail involved in a multiplicity of policies, but has thrown 
it in some measure upon the underwriter. However, by con- 
tract participating and excess reinsurance this detail is reduced 
to a minimum, and the dividing and distributing of risks con- 
tinues until all the recognized underwriting capital in the markets 
of the world is pledged directly or indirectly for the protection 
of these jumbo lines. 

Jumbo Lines. — ^Doubtless this has resulted in a degree of dis- 
satisfaction among some of the smaller underwriters, who would 
prefer to have the prestige which large direct lines give, rather 
than the more certain income obtained from a wide distribution 
of smaller Unes. Efforts have been made on behalf of the smaller 



REINSURANCE 283 

underwriter to cause a wider distribution of business by limiting 
the amount of reinsurance which a company can obtain to, say 
fifty percent of the written Une. While such legislation might 
succeed in its purpose of causing a wider distribution of direct 
underwriting, it would result in other evils more baneful in their 
effects than that for which a cure was sought. For instance, the 
larger companies in order to retain their prestige might be in- 
duced to hold larger lines than prudent underwriting practice 
would warrant, while many of the smaller companies, not well 
known, would probably receive few direct lines, thus losing the 
steady income which reinsurance lines furnish. While it might 
be possible in relation to fire insurance to conduct business on 
the basis of a wide direct distribution of risk, just as it would be 
possible to give a wide direct distribution of the insurance on 
hulls in marine underwriting, such a method of transacting insur- 
ance would encounter insuperable obstacles in the placing of 
cargo insurance. 

Necessity for Large Limits. — ^This will be evident when, for 
example, it is considered that in the importation of raw and 
manufactured products, it often happens that the first advice of 
shipment that a merchant has is a cable announcing that the 
Str. — has left Singapore with $1,500,000 worth of crude rubber 
at his risk. Were it not possible for the assured to contract 
in advance under an open policy or policies for protection suffi- 
ciently large to take care of a shipment of this size, arrangements 
would be made to have the goods shipped insured, that is on 
c.i.f. terms, the insurance being placed in foreign markets. 
For the merchant in this country to place in advance contracts 
with scores of underwriters in amount ranging from $5,000 
to $200,000, the ordinary range of capacity of the various com- 
panies, provided they were restrained by law from reinsuring 
more than fifty percent of their interest, would be impracticable 
if not impossible, because underwriters would not care to en- 
gage their maximum capacity, when such a large shipment was 
an exception and the average declaration did not exceed $250,000. 
Under the present system a few underwriters will jointly under- 
take the insurance of large maximum Unes, and by participating 
and by excess reinsurance obtain even on smaller declarations 
a fair run of business. On the other hand when business eventu- 



284 MARINE INSURANCE 

ates quickly and a large amount of insurance is needed within a 
few days or sometimes a few hours, were it not possible to place 
large lines, permitting the individual company to distribute the 
risk, modern business would encounter a handicap which would 
seriously interfere with the success of commercial undertak- 
ings where time is the controUing factor. There is ordinarily 
enough business to give every company sufficient direct lines com- 
mensurate with its size, as even the largest company will not 
assume more than a limited number of open poUcy accounts, 
that niunber being controlled largely by its reinsurance facili- 
ties, while many small accounts will be placed with the smaller 
but equally safe companies. Safety cannot always be judged by 
the size of the company, but rather by the soundness of its under- 
writing methods. Most of the large companies started on a small 
basis but by conservative methods have attained success. 

Retained Lines. — Fortimately legislation of the character de- 
scribed has not been successful, although within recent years a 
bill of this character passed the legislature of one of the Middle 
Western States, only to be vetoed by the governor. It is 
probable, however, that from time to time, similar legislation will 
be proposed, and it is well to be forearmed against a seem- 
ingly beneficial form of aid to small companies which would 
result adversely to all underwriting and put a serious handicap 
on business in general. In New York State, the legislature has 
recognized the peculiar conditions surrounding the placing of 
marine insurance and has removed all restrictions as to the 
amount of liability which a marine company may assume, leaving 
the reduction of retained Unes to the individual judgment of each 
company. It is probably true, that in every case, except where 
through some inadvertence the procurement of reinsurance has 
been overlooked, marine underwi iters will carry as a retained 
line much less than the prescribed limit of ten percent of the 
capital and surplus, to which fire and other forms of insurance 
are limited by law. 

Purpose of Reinsurance. — Reinsurance then is the method by 
which Uability is distributed over the entire underwriting market. 
It is a branch of insurance which airectly concerns only under- 
writers, but the insuring pubUc is indirectly interested, in that by 
virtue of the system of inter-reinsurance underwriters are enabled 



REINSURANCE 285 

to spread their liability over vast numbers of risks, with a moder- 
ate amount of liability in each risk, thus stabilizing the business. 
It was not until recently that the question of reinsurance became 
a matter of general interest to the pubUc. When, however, it 
was revealed that through the processes of reinsurance our 
enemies could readily obtain information in regard to the move- 
ment of ocean steamers, and in the fire reinsurance market, 
information as to the location of manufacturing plants in which 
government contracts were being executed, it came home to the 
public that there was a vast and intricate system of distributing 
Uability over the underwriting markets, not only of this country 
but of the entire world. 

Reinsurance Not Different in Principle. — Reinsurance in no 
wise differs in principle from any other form of msurance. The 
contractual relation is one between underwriter and underwriter 
instead of between merchant or shipowner and underwriter, but 
aside from this, the contract of reinsurance resembles in toto 
the ordinary mercantile contract of insurance. An underwriter 
obtains an insurable interest in each piece of property which he 
insures because he enters into a relation in which he is financially 
interested in the continued existence of such property. He will 
be damnified by its injury or destruction through the necessity 
of reunbursing the owner for the damage or loss incurred. There 
can, therefore, be no doubt that underwriters have an insurable 
interest in property which they insure. This, then, being the 
case, there is no difference in principle between a contract of 
insurance and a contract of reinsurance. However, in actual 
practice many conditions peculiar to reinsm-ance appear and some 
consideration of them will aid in giving a better understanding of 
the subject. 

Special and Floating Reinsurance Contracts. — ^As in the case 
of direct insurance, special contracts relating to a specific risk 
may be issued, or open or floating contracts of reinsurance may 
be arranged, limited as to UabiUty, time and geographical scope. 
Reinsurance may follow the precise terms and conditions of the 
original insurance or the original underwriter may only wish to 
reinsure or be able to obtain reinsurance against a part of the 
risks which he directly assumes. Thus, the original Under- 
writer may insure property, subject to average, but not be able 

20 



286 MARINE INSURANCE 

to find any other underwriter who is willing to reinsure on any 
but free of average terms. Reinsurance policies usually contain 
what is commonly termed the reinsurance clause which reads 
somewhat after the following form, i.e.: 

''Being a reinsurance subject to the same clauses and conditions as 

the original policy or policies of the said Insurance Company, 

whether reinsurance or otherwise, and to pay as may be paid thereon; 
but subject to the /' any exceptions made to the original con- 
ditions, such as the free of particular average clause, being inserted in 
the final blank space, or in a separate clause and referred to in this 
blank space. 

Reinsurer Bound by Acts of Reassured. — ^The reinsuring 
company, by this clause or by one of similar import, agrees to be 
bound by the underwriting judgment of the original underwriter 
as evidenced by the policies issued by him, and to which the 
reinsurance contract in question relates, except in so far as ex- 
ception to certain conditions may be embodied in the reinsurance 
poUcy. Furthermore, the reinsuring underwriter agrees to abide 
by the adjustment and mode of settlement arranged between the 
direct underwriter and his assured. When the amount of a loss 
is large as in the cases cited in the opening of this chapter and the 
reinsurance is placed locally, the financing of the payment of loss 
is a matter of considerable preparation. For instance, suppose 
the X Insurance Company has suffered a loss of $1,500,000. 
Were it to pay this entirely out of its own fimds, it might require 
the liquidation of some of its securities, perhaps at a sacrifice, 
or their hypothecation as security for a loan, as a company seldom 
has iminvested a sum as large as that named. In actual practice, 
however, the settlement of such a loss merely calls for the outlay 
on the part of the original underwriter of an amount equal to his 
net retained line. Several days before the claim is to be settled 
notice is sent to the reinsuring underwriters that upon a certain day 
the loss is to be paid and requesting that payments covering their 
proportion of the loss be made to the original underwriter on or 
before that day. The underwriter draws his check for the entire 
amoimt of loss, depositing to his credit on the same day the checks 
of the reinsuring underwriters for their proportion of the payment, 
so that at the close of business on the day of payment the bank 
account of the original underwriter is depleted only to the extent 



REINSURANCE 287 

of his retained line. Of course^ this mode of settlement can be 
availed of only when the reinsuring underwriters are located 
in the same city as the original underwriter and are willing 
thus to assist him. They may, however, refuse to reimburse 
him until he has made actual settlement of loss. Where re- 
insurance is placed in other cities or in foreign markets it is 
not practicable to settle claims in this manner. 

Limitation of Liability. — While it is true that under the 
Law of New York State where a large proportion of the marine in- 
surance business of the United States is transacted, marine 
companies are unrestricted as to the amount of liability which 
they may assume and retain, as a matter of practice under- 
writers have definite limits which it is their custom to retain 
on each particular class of business. With many contracts 
outstanding there is no method by which an underwriter can 
control his UabiUty. He does, to be sure, have a limit of liability 
under each contract which he issues, but in the actual processes 
of shipment, many contracts may become operative in connection 
with shipments by a single vessel, with the result that the under- 
writer may have at risk by such vessel a Habihty greatly in excess 
of his normal retained Une. In order to provide against this con- 
tingency underwriters take out with their fellow underwriters con- 
tracts of reinsurance, placed as a general rule, either as share rein- 
surance or as reinsurance attaching on the excess of a fixed amount. 

Share or Participating Reinsurance. — ^In the case of share, 
or participating reinsurance as it is sometimes called, the under- 
writer agrees to give to his reinsurers, a definite proportion of 
all his business moving over specified routes of ocean travel or a 
definite share in a certain line of business moving over the 
described routes of trade. Sometimes participating reinsurance 
involves only a single account placed with the original under- 
writers, the reinsuring underwriters automatically covering under 
a prearranged contract a definite percentage of the insurance 
assumed by the original imderwriter. It may happen, that 
notwithstanding the protection afforded by such share insurance, 
there is still the possibiUty of a line remaining greater than the 
normal line which the underwriter desires to retain. To provide 
against this contingency the underwriter contracts for what is 
known as excess reinsurance. 



288 MARINE INSURANCE 

Excess Reinstirance. — Under this fonn of contract reinsurance, 
the geographical and time Umits are definitely set forth and a 
clause is inserted to the effect that such reinsurance is to attach 
at and from the first port within the geographical limits specified, 
at which the original underwriter has an excess under his various 
policies considered as a whole regardless of whether such policies 
cover direct lines received from his assured or reinsurance received 
from another underwriter. This excess may attach when the 
original underwriter has a retained line of any fixed amount, 
say $100,000, by any one steamer or at any one place as described 
in the contract, and will cover such excess up to the limit of the 
excess poUcy on the commodities specified therein. It is usually 
provided that in determining the amount appticable to the excess 
reinsurance poUcy, the various interests of hull, freight and cargo, 
including specie, profits and any other interests are to be taken 
into account. The original underwriter keeps all of these in- 
terests so long as the retained Une does not exceed $100,000. 
In determining the retained Une for ihe purpose of excess re- 
insurance a further factor enters into the calculation. This is the 
question of share reinsurance, which, according to the terms of the 
ordinary excess reinsurance policy, is first deducted, and whatever 
remains at the risk of the original imderwriter after such de- 
duction is made is his net retained line. It may be that the 
reinsurance contract is taken out to cover only certain com- 
modities, such, for instance, as wool and hides imder a policy 
covering from ports on the River Plate to Atlantic or Gulf 
ports of the United States. If the net retained line in such case 
exceeds $100,000, then there is reported under the Excess Re- 
Insurance PoUcy wool and hides only until the retained line of the 
original underwriter is reduced to $100,000 or the amount in- 
sured on wool or hides is exhausted or the limit of the excess 
contract is reached. 

Effect of Determination of Excess Amount. — It should be 
observed that once an excess has attached under an excess 
reinsurance poUcy, it continues to attach throughout the continu- 
ance of the risk as per original poUcy or poUcies, notwithstanding 
any discharge, transhipment or division of interest and any 
claim is settled pro rata. In other words, when an excess is de- 
termined, excess reinsurance becomes precisely of the same nature 



REINSURANCE 289 

as share or participating reinsurance. For example, in the case 
of the wool and hides policy cited, if all the wool and hides were 
declared to the reinsuring underwriters, the reassurer would 
assume the whole burden of the risk on wool and hides, provided 
the reinsurance was placed on original terms and conditions. 
If, on the other hand, the declaration gave a part of the wool 
and hides to the reinsiuing underwriter, the retained line of the 
original underwriter consisting in whole or in part of wool and 
hides, the original and reinsuring underwriters would each be liable 
for their pro rata proportion of any loss incurred on these 
commodities as in the case of share reinsurance. Excess re- 
insurance of the character under discussion differs from share 
reinsurance only in the method employed in determining the 
amount appUcable to the reinsurance contract. 

Division of Interest. — ^Division of interest frequently occurs 
through the transhipment of cargo. A steamer loads at a distant 
port a large quantity of goods on which an excess accrues. The 
vessel proceeds to a transhipping port, still within the geograph- 
ical limits of the excess contract, where she discharges her cargo, 
which instead of being reladen on a single steamer is reladen on 
two steamers, on neither of which the original underwriter has 
an amount equal to his retained Une under the excess policy. 
Notwithstanding this division of interest, the relation between 
the original underwriter and his excess reassm-ers is not dis- 
turbed, the status of the risk having been fixed at the original 
point at which the excess attached, the insurance having assmned 
the nature of share insurance, and the underwriters, original 
and reassurer continue through to destination by the tranship- 
ping steamers, eaph with his pro rata share of the cargo on the 
original steamer. 

Complications at Transhipping Points. — However, a complica- 
tion may arise at the transhipping point, if other cargo is laden 
on the transhipping steamers in such quantity that the unused 
portion of the net retained Une of the original underwriter is 
exhausted and an excess amount results which the reinsuring 
underwriter can take without exceeding the limit of the reinsur- 
ance contract. Whether or not this new cargo can be brought 
into the reinsurance relation will depend upon the care that 
has been exercised in drawing up the reinsurance contract. A 



290 MARINE INSURANCE 

further complication will arise if cargo, which originates at ports 
beyond the geographical limits of the reinsm'ance pohcy, is also 
loaded on the same transhipping steamer at the transhipping port 
and is at the risk of the original imderwriter. It may further 
appear that a portion of this cargo originating outside the Umits 
of the reinsurance policy in question already has reinsurance 
on it. The possibilities of complications arising in connection 
with the placing of excess reinsurance are endless, and no little 
degree of skill is required to so word these poUcies that the pro- 
tection desired will really be afforded by the terms of the contract- 
Prior Losses Under Excess Policies. — It is customary to insert 
in excess reinsurance contracts a clause by which it is agreed that 
in the event of any claim arising in craft or on shore prior to 
shipment or on board the vessel before completion of loading, the 
excess shall be ascertained by taking into account the whole of 
the interest shipped or intended to be shipped by the vessel 
declared, the loss to be settled pro rata. The effect of this 
clause is, that if it can be definitely shown that certain goods 
which have been damaged or destroyed before being laden on the 
vessel in question, would, if not destroyed, have been loaded on 
such vessel in the ordinary course of transportation, and if they 
had been so loaded, their value, added to that of the goods which 
actually were laden, would have produced an excess declarable 
under the contract — the reinsuring underwriter will be liable for 
his pro rata share of such loss. If the loss occurs to goods on 
board a Ughter at, or destined for, the steamer or to goods on the 
wharf at which the steamer is loading, it is not a diificult matter 
to determine whether or not the lost or damaged goods would 
have been laden on board the steamer. But if the loss occurs 
on the railroad or on a connecting steamer, the problem of deter- 
mining whether or not the goods would have connected with the 
steamer on which the excess would have accrued, becomes a 
matter of considerable difficulty, and in cases where through 
bills of lading giving the name of the connecting steamer are 
not issued, the problem is practically impossible of solution. 

Excess Loss Reinsurance. — Under the form of excess rein- 
surance discussed up to the present point, it has been assumed 
that the original underwriter will know the exact amounts that 
are at his risk by any named steamer. On many routes, however, 



REINSURANCE 291 

such as the coastwise routes of the United States, it is a practical 
impossibility for an underwriter to obtain tracings, that is, infor- 
mation as to the definite steamer by which goods are forwarded, 
insurance being declared merely by naming transportation lines 
instead of steamers. There is also the possibility of an under- 
writer unwittingly having at risk a Uability greatly in excess of 
his normal line, yet his inability to obtain definite information as 
to this precludes his obtaining excess reinsurance of the character 
previously considered which has as its basis the determination of 
retained lines. True, the underwriter may divide his accounts by 
placing share reinsurance, thus reducing his liability, but this still 
leaves the possibiUty of heavy UabiUty being unwittingly assumed. 
To overcome this difficulty another form of excess reinsurance is 
obtained under which the measure of Uability is not the amount 
at risk but the amount of loss incurred. 

Speculative Reinsurance. — ^An underwriter may be willing to 
face the possibility of suffering a loss of $100,000, but may feel 
that any loss greater than this amount would be out of all propor- 
tion to the average amount of Uability which he purposes to carry. 
Accordingly he contracts with other imderwriters to assume 
UabiUty for any loss occurring within certain geographical and 
time limits in excess of $100,000 up to an amount which he 
concludes would represent his greatest possible UabiUty on routes 
by which he receives no definite names of forwarding vessels. 
For such insmrance a fixed annual premium is charged based on 
such estimated figures as the original underwriter may be able 
to furnish. Such reinsurance is, of course, very speculative, 
the protection afforded, if the excess attachment point is high, 
being practicaUy against total or constructive total loss only, 
arid in the absence of losses, it is impossible to determine whether 
or not the reassurer has any UabiUty at risk. However, such 
insurance does, at least, ease the mind of the original underwriter, 
in that he is reasonably certain if he has procured sufficient excess 
reinsurance of this character that he cannot suffer a loss greater 
than he is willing to bear. 

Shore Reinsurance*. — A similar situation exists in connection 
with the interior risk which is involved in the transportation of 
goods and which is ordinarily insured in connection with the ocean 
risk. Shipments move over widely diverging routes to the 



292 MARINE INSURANCE 

great seaboard ports resulting in the possibility of an underwriter 
having excessive Unes at the railroad terminals or on the steam- 
ship piers. A similar condition exists at ports of destination or 
at transhipping ports, where because of the arrival of two or more 
vessels at one time, congestion may arise at these ports which will 
result in an underwriter unwittingly having heavy hues at risk 
in a single location. Since it is practically impossible to trace 
the lines at risk in such locations, underwriters contract for 
excess fire insurance based on the amount of loss which may be 
incurred. They will assume full liability for all loss not exceeding 
a fixed sum, say $50,000, while the reinsuring underwriters agree 
to reimburse the original underwriter for any losses in excess of 
this amount, but not exceeding a fixed limit. The possibility 
of loss under these excess contracts is not great, as they are not 
interested in minor losses, and the rate of premium charged is, 
therefore, comparatively low. 

Co-insurance. — ^It will be noted that imder the ordinary form 
of excess insurance where the liabiUty is predicated on the 
amount at risk, the reinsiu'ing underwriter becomes a co-insurer. 
His liability is measured by comparing the amount declared under 
the reinsurance policy with the total amount insured on such 
goods by the original underwriters. However, under excess 
reinsurance based on losses incurred, there is no question of co- 
insurance involved. 

Special Reinsurance Risks. Flat Reinsurance. — While the 
consideration of reinsurance, up to this point, has involved the 
discussion of open contracts, reinsurance is constantly placed 
as special risks, and the same principles apply to this form of 
reinsurance, although the complications involved are not apt to 
be as great as those that occur in the placing of open reinsurance 
contracts. Special reinsurance is placed on either the partici- 
pating or excess basis or maybe placed flat. That is, the original 
underwriter may reinsure a definite amount, say $50,000, on a 
certain risk with another underwriter, such amount not being sub- 
ject to change if the retained line of the original underwriter is 
materially reduced or cancelled in full. Ordinarily, if the original 
line is never at risk, the underwriter with whom the flat reinsur- 
ance has been placed must consent to its cancellation. Sometimes 
flat reinsurance is placed without right of cancellation, in which 



REINSURANCE 293 

event the original underwriter must pay the reinsurance pre- 
mium notwithstanding the fact that he receives no original pre- 
mium and that his reinsuring underwriter incurs no risk. There 
is a degree of justification for this attitude in that the reinsuring 
underwriter, by accepting this flat reinsurance, may have engaged 
his entire capacity by the vessel in question, and as notices of 
short interest or cancellation are usually received by the original 
underwriter after the vessel has sailed or when it is about to sail, 
the reinsuring underwriter is precluded from obtaining new in- 
surance to replace that which it is sought to cancel, and thereby 
loses business that otherwise might have been his. The word 
"flat" as used in connection with reinsurance means closed or 
determined, indicating that the transaction is a completed one 
and not subject to change. 

Reinsurance Pools. — It quite frequently happens that after 
a long period of bitter competition between underwriters, with 
its usual attendant loss to them all, they will come together in a 
spirit of conciUation and agree one with the other to share a 
definite Une of business, in order that the. rates may be brought 
to such a level as to insure a profit on the business written. To 
this end, what is known as a pool is formed, in which each member 
agrees to reinsure with every other member of the agreement a 
predetermined proportion of all such business which he writes, 
definite rates of premium being arranged for the exchange of such 
reinsurance. This has a beneficial result, not only to the under- 
writing community, but also to the insuring pubUc. WhUe 
competition undoubtedly produces lower rates and has a salu- 
tary effect, competition, if carried to extreme lengths, results in 
impaired security, because the premium income is insufficient 
to pay for the losses incurred and capital and surplus are affected. 
If underwriting can be put on a sound basis, by which the public 
pays to the underwriting community a premium sufficient to meet 
all the necessary expenses of the business and leave a fair margin 
of profit on the capital invested, a distinct benefit has been gained 
both by the insuring pubUc and by the underwriters. This is 
the result of reinsurance pools which are properly conceived and 
efficiently conducted. 

Reinsurance Subject to Original Conditions. — It must be 
remembered that in dealing with the original assured the under- 



294 MARINE INSURANCE 

writer is dealing with a specific risk. When he in turn reinsures 
his Unes, he is probably reinsuring not the risk of an individual 
assured, but it may be the risks of a large number of original 
assureds, each one of whose policies involves a different set of 
conditions and the reinsiu'ance contract, especially an excess 
reinsm'ance contract covering on cargo generally, is indirectly 
interested in all these differences. It is, therefore, desirable 
where possible that the reinsurance shall follow precisely the 
terms and conditions of the original insurance. It is ordinarily 
much easier to arrange this in the case of participating reinsur- 
ance than in the case of excess reinsurance. In any event the 
difference in terms between the original insurance and the re- 
insurance should not extend beyond a difference in average con- 
ditions, much reinsurance being placed on F.P.A. terms regardless 
of the average conditions of the original insurance. 

Reinsurance at Original Rates. — If reinsurance is placed on 
original terms and conditions, it simplifies matters greatly to 
place the reinsurance at the original rates less a discount sufficient 
to offset the brokerage and taxes and possibly other incidental 
expenses of the original underwriter. Participating reinsurance 
is usually so placed that the average conditions in the reinsurance 
poUcy follow precisely the original conditions. If, however, 
the average conditions differ, some allowance should be made 
in the rate to compensate the original underwriter for the perils 
which remain at his risk. Excess reinsurance may be placed at 
original rates, but more often such reinsurance is arranged on a 
definite schedule of rates. 

Market Conditions. — Reinsurance which is specially placed 
by an underwriter as a rule has to take its chances in the open 
market and often imderwriters incur a heavy loss in placing 
such risks. Again, an underwriter may find in the reinsurance 
market, other underwriters, who in an endeavor to obtain busi- 
ness, are willing to quote a rate which is less than that received 
on the original insurance. Whatever may be the state of the 
market, a prudent underwriter will obtain reinsm'ance, in order 
that he may retain only a conservative line. 

Arbitrage.— Some imderwriters, unfortunately, will take ad- 
vantage of a full market and charge a competitor, who must 
have accommodation, an amount greatly in excess of the market 



REINSURANCE 296 

rate, and greatly in excess of what experience has proved such a 
risk to be worth, knowing that he can under contract reinsurance 
or in some other reinsurance market, again reinsure the whole 
or a part of the risk at a much lower rate, thus making a profit. 
If the whole amount is reinsured by the second underwriter, 
the difference between the two rates will be clear profit, as he wlQ 
incur no liability other than the guaranteeing of the reinsurance 
eflfected by him. The profit in this interchange of reinsurance 
is known as arbitrage. 

Reinsurance of Unterminated Risks. — In some cases through 
mismanagement or through a series of unfortunate losses, the 
capital of a company will become impaired and not being able 
to raise additional funds to make good the impairment, it becomes 
necessary for the company to retire from business. There will, 
of course, be outstanding at such time a number of unterminated 
risks, and in order that the settlement of the affairs of the liquidat- 
ing company may not be delayed and in order that the poUcy 
holders whose risks are still unterminated may be protected, the 
liquidating company will if possible and if it has funds with which 
to pay the premium, reinsure its outstanding liability with other 
underwriters. 

Reinsurance of Overdue Vessels and Vessels in Disaster.-^ 
It also happens quite frequently in the case of vessels out of 
time, that is vessels which are overdue at their ports of destina- 
tion, or in the case of missing vessels, or in the case of vessels 
which have met with disaster and whose fate is in doubt, that 
underwriters will realize that they are carrying lines greater than 
they would care to lose, and accordingly go into the reinsurance 
market to reinsure all or a part of their line. The original under- 
writer is bound in all cases and especially in cases of this nature 
to make a full disclosure of the existing facts, the law respecting 
representation, misrepresentation and concealment applying 
equally to direct insurance and reinsurance. It therefore is only 
natural that market rates in the case of overdue and missing 
vessels and vessels in disaster will rapidly soar, rates of ninety- 
five percent being sometimes charged where the condition of 
the vessel is known or presumed to be extremely perilous. 

Reinsurance Bordereau. Concurrent Reinsurance. — Reinsur- 
ance when placed on the participating or share basis, is usually 



296 MARINE INSURANCE 

declared by the original underwriter to his reinsurers in detail. 
Each individual risk is set forth on large sheets, a full description 
of the voyage, the vessel, sailing date, kind of goods, average 
conditions, amount of insurance and original premium charge, 
being noted. These sheets are known as bordereaux, and if 
the reinsurance is placed in several shares, the sheets are mani-r 
folded, each reinsuring underwriter receiving his copy. The 
share of each risk reinsured may be separately extended and the 
reinsurance premium noted against it, or all the entries on a sheet 
may be totalled, the percentage of allowance on the premium 
subtracted, and the net amount of premimn divided into shares 
as called for by the reinsiu-ance contracts. Where more than 
one underwriter is interested in reinsurance, each taking a share 
on equal terms and conditions, such reinsurance is known as 
concurrent reinsurance. 

Foreign and Domestic Reinsurance. — Prior to the outbreak 
of the world war a large portion of the reinsurance done in the 
American market found its way into the English and Continental 
markets. However, with the rapid growth of marine insurance 
in this country, it is now possible to place large lines of reinsurance 
in the American market, Uttle difficulty being experienced in 
covering lines up to $1,000,000. Of coiu*se, the reinsuring under- 
writers do not necessarily retain the lines which they reinsure, 
but under reinsurance contracts, or treaties as they are sometimes 
called, these risks may be spread out in all directions, so that if 
the placing of a large line, say $3,000,000 or $4,000,000, could be 
traced in detail, it would be found that portions of the risk were 
lodged in every available market of the world. 

Original Assured Has no Claim on Reinsurance. — The insuring 
public should realize, when placing insurance with companies 
of moderate size who write large lines, that the company whose 
policy they hold probably is retaining but a very small percent- 
age of the liabiUty assiuned. While in the event of a total loss 
the assured looks to the original company for the payment of 
the loss, he bearing no relation nor having any claim against the 
reinsuring company, yet the security of its insurance rests in- 
directly on the stabiUty of the reinsuring underwriters. It is, 
therefore, pertinent for an assured to make inquiry as to the 
security of the reinsuring underwriters. 



CHAPTER 18 
LOSSES. INTRODUCTION. GENERAL AVERAGE 

Losses Beneficial to Marine Insurance. — Thus far the consider- 
ation of marine insurance has been from the constructive side, 
which is primarily engaged in the accumulation and preservation 
of funds to provide indemnity for inevitable losses. While it 
is true that an undue proportion of losses will result in the de- 
struction of marine insurance companies, it is equally true that 
losses make the business possible. Underwriters do not invite 
losses, nevertheless they are welcomed in moderation as furnish- 
ing the very best reason for the origin and continuance of the 
business of insuring. When losses are reduced to a minimum, 
question then arises whether it is not cheaper for an assured to 
carry his risk than to insure it. Fortunately for the insurance 
business, the assiu*ed who reasons thus, and who attempts to put 
his theory into practice, seldom succeeds and generally gains an 
entirely new point of view in regard to the hazards of marine 
transportation. Experience usually teaches merchants and ship- 
owners a salutary lesson on the folly of endeavoring to insure 
without having a wide and varied distribution of risk. However, 
until natm*e operating on the high seas, changes its laws, losses 
will happen and the necessity for marine insurance will continue. 

The Conduct of Loss Matters Important — The success or 
failure of an insurance company, while dependent in considerable 
measure on the judgment shown in underwriting, is in no less 
degree dependent on the conduct of its loss affairs. Undue 
liberaUty in the settlement of losses may result in impairment of 
capital, while unfair or parsimonious methods in the adjustment 
of claims will surely be felt in injured reputation which is only 
less fatal than impaired capital. A happy medium must be 
found where the assured will receive, as nearly as may be, full 
reimbursement for loss suffered, notwithstanding the fact that 
there may be, through no fault of his, some technical objection 
to the claim presented. An assured in paying premium expects 

297 



298 MARINE INSURANCE 

to purchase, not a lawsuit, but indemnity against a possible 
loss. He does not pretend to be an expert in the principles of 
insurance, but relies on his underwriter or his broker to furnish 
the measure and kind of protection which his necessities require. 
Unfortunately the assured in many cases is quite ignorant of the 
principles of insurance, and objects to paying the price which 
would purchase the type of protection which would best serve 
his needs, and in the event of loss considers that the underwriter 
is unduly technical or even unjust when he refuses, for instance, 
to pay a particular average claim under a policy issued on free 
of average terms and at a free of average rate. 

Insurance Funds Must be Conserved. — ^Loss adjusters must 
be technical. It is only by the closest scrutinizing of claims, and 
by the most careful adjustments that marine insurance can be 
kept on a paying basis. The results are so uncertain, the possi- 
bility of a series of heavy losses is always imminent, while the 
keen competition which ordinarily exists in the marine insurance 
market makes the business a precarious one, at best requiring the 
greatest skill in underwriting and the most careful conserving of 
funds in the payment of losses and in the cost of operation in order 
that the balance may continue on the credit side of the books. 
Statistics aid materially in marine underwriting, but regardless 
of theories evolved from computations, unexpected losses will 
happen and must be paid. The assured, in buying insurance, 
receives some definite kind of protection and that alone, just 
as surely as when he buys a ton of coal he gets only coaJ and not 
in addition a quantity of kindling wood to ignite the coal. The 
business of loss adjusting is primarUy engaged in measuring what 
the assured has bought and deUvering his purchase to him in 
the form of indemnity for loss, a task that at times requires the 
wisdom of a Solomon, in view of the clauses which underwriters 
and brokers devise. 

Loss Adjusting a Profession. — The profession of loss adjusting, 
while conducted in connection with and as a necessary part of 
marine imderwriting, is a science in itself and requires a different 
kind of training from that which develops a successful imder- 
writer. It is true that underwriters as a rule understand the 
theory of loss adjusting and in fact can, and do, if necessary 
adjust losses, but a too close adhesion to the caution and care 



LOSSES. INTRODUCTION. GENERAL AVERAGE 299 

needed in the adjustment of losses, is apt to result in timidity 
in underwriting. Constant devotion to the adjustment of 
losses is apt to produce a state of mind where every risk written 
represents a possible loss rather than a possible safe arrival, 
an attitude of mind in an underwriter that can lead only to over- 
conservatism in the selection of risks. Better underwriters are 
produced when the underwriter has a thorough knowledge of 
underwriting and a theoretic knowledge of loss adjusting. The 
converse is equally true that a better loss adjuster results from a 
mind expert in the technique of loss adjusting with a theoretic 
knowledge of underwriting. 

Specialization in Loss Adjusting. — The field of average or loss 
adjusting is so broad that specialization has resulted. We find 
some adjusters who devote their time to losses on special in- 
terests, that is, to particular average and total loss cases. Others 
will confine their work exclusively to general average adjusting 
which is a science in itself and one requiring the highest degree 
of skill. General average, as has already been indicated, is a 
much older method of maritime protection than is marine in- 
surance. Its principles are founded on maritime law, and not on 
the law of marine insurance. General average adjustments are 
never made in the offices of marine insurance companies. They, 
however, retain on their staffs men skilled in the criticism of 
general average adjustments, who examine the statements as 
prepared by the adjusters to see whether or not the interests of 
all concerned in the case have been safeguarded. 

General Average. — It is felt by many that had marine insur- 
ance, as at present practised, been devised twenty-five hundred 
years ago the need for general average would never have arisen. 
Marine insurance furnishes all the protection needed in the 
conduct of maritime ventures, and if a condition of affairs could 
be conceived where general average was proposed as a new theory 
to aid in the conduct of marine insurance, it would probably be 
dismissed as out of harmony with modern business methods. 
Antedating marine insurance, however, the practice of general 
average has become deeply rooted in the commercial law of all 
maritime nations. The old Rhodian Law promulgated in the 
tenth century B. C. provided for general average contributions in 
the case of jettisons. Whether this theory of distributing losses 



300 MARINE INSURANCE 

originated with the Rhodians or was acquired by them from earlier 
masters of the sea, is of Kttle moment, the fact remains that the 
idea of which the earliest record is found in the Rhodian Laws, 
was incorporated in the Roman Civil Law. During the Dark Ages 
no trace is f oimd of the theory, but with the revival of European 
conmierce in the Middle Ages, general average again appears as a 
part of the sea codes, existing side by side with marine insurance, 
but separate from it. Marine insurance was interested only 
indirectly in general average and general average was not directly 
concerned with marine insiu'ance. These two forms of maritime 
protection existed, each fulfilling its separate mission. Mer- 
chants who suffered loss in general average sacrifices did not 
seek reimbursement imder their insurance policies until they had 
received contribution from the other interests involved, when 
they made claim upon their imderwriters for the proportion of 
the loss not made good in general average. In fact, it is only 
within the last half centmy that the assured has made claim 
directly on the imderwriter for losses suffered in general average 
sacrifices. The underwriter now reimburses the assured for 
losses suffered, awaiting the stating of the average in order to 
receive recoupment from the contributions made for the benefit 
of the lost or damaged property. 

No Reasonable Substitute for Oeneral Average Tet Found. 
— The abandonment of the practice of general average has been 
advocated in recent years, the great object in modem business life 
being to use short cuts and to do away with unnecessary detail. 
While it doubtless would be desirable to eliminate the inevitable 
detail and expense connected with the stating of general average, 
no practical plan has been formulated to accomplish this end. 
On the other hand, the fact cannot be ignored that the existence 
of the law of general average has a salutary effect in preventing 
the unnecessary destruction of property through jettison or 
otherwise in efforts to save vessels in positions of perils. If the 
ship had not been legally boimd to contribute for jettisoned 
cargo, there is little doubt that much more cargo would have 
been destroyed in the past. No solution of the general average 
problem will be satisfactory which merely eliminates the detail 
of the present system without preserving its beneficial features. 
It may be that a closer union between the nations in the future 



LOSSES. INTRODUCTION, GENERAL AVERAGE 301 

may make possible international enactment on the subject. 
In the meantime, general average is engrafted on marine insur- 
ance and is of such great importance, that no consideration of 
marine insurance can be complete without at least some outline 
of the underlying principles of this branch of maritime law and 
practice being given. 

Definition of General Average. — A general average loss is one 
which is the result of a sacrifice voluntarily made, under for- 
tuitous circmnstances, of a portion of either ship or cargo or the 
voluntary incurrence of expense for the sole purpose of preserving 
the common interest from an impending danger. When a vessel 
becomes involved in a peril, and in order to save the common 
venture from that peril or to extricate it from its ultimate results, 
sacrifices are made or expenses are incurred by the master, 
acting for the benefit of all concerned, these sacrifices and ex- 
penses must be borne by all the interests involved, whether 
ship, freight or cargo, in the proportion which the amount pre- 
served to each interest bears to the total value saved. The task 
of determining the simi which each interest shall pay, or, in the 
event of an interest having been called upon to make a sacrifice, 
the amount which it shall receive, is accomplished by the general 
average adjusters to whom reference has been made. The 
amount of detail involved in these cases depends in large measure 
on the number of interests involved. The preparation of a 
general average adjustment in the case of a vessel carrying bulk 
cargo which is owned by one interest is a simple matter. In 
the case of a large steamer, however, loaded with a miscellaneous 
cargo owned by himdreds of different shippers or consignees, the 
stating of the general average is a task involving tremendous 
detail. The final average adjustment as pubUshed and distrib- 
uted to underwriters and shippers for their examination in such 
cases sometimes occupies two or three volumes of five hundred 
pages each. 

The General Average Adjuster. — The average adjuster takes 
complete charge of the case. He is usually appointed by the 
owner of the vessel since this is as a rule the largest single interest 
involved. When the vessel is released from the peril and arrives 
at the port of destination, the master is required to keep the 
interests together until security is given for the payment of such 

21 



302 MARINE INSURANCE 

charges as may be assessed against each interest involved in the 
venture. Accordingly a form of general average bond (see appen- 
dix, p. 424) is prepared which recites the circumstances under 
which the general average sacrifices were made and the expenses 
incurred, and wherein the signatories of the bond agree with the 
owners of the vessel and with one another to provide all necessary 
information and also obligate themselves to pay the losses and 
expenses therein mentioned which may be shown to be a charge 
on the cargo of the vessel when the adjustment is completed. 
In addition to this bond, the adjiisters may also demand security 
for the payment of the charges before they will release the goods. 
This security is given in one of two ways. If the goods are not 
insured, the owner is required to make a cash deposit sufficient 
to cover the estimated charges which may finally be assessed 
against his particiilar interest. If the property is insured with 
an insurance company, the adjusters are usually wilUng to accept 
the guaranty of the underwriters for such charges (see appendix, 
p. 426). 

Laws of General Average Not Uniform. — There are no limits 
set with respect to the circumstances out of which a valid general 
average may arise. The laws of the various maritime countries 
differ from each other, and in our own country there is no uni- 
formity between the customs of the various states respecting 
general average. Efforts have been made to reconcile the differ- 
ences and to produce an international code of general average — 
the York-Antwerp rules, to which reference will be made, 
being the nearest approach to such a code. Associations of 
average adjusters organized in this and other countries have 
adopted rules for the adjustment of general average cases, but 
none of these efforts changes the law of general average as devel- 
oped in the various countries. This code and these rules when 
agreed to by the interested parties merely furnish a basis for 
adjustment, but in so far as these rules do not cover the particular 
point involved, the law of the land where the adjustment is to be 
made or the customs of the port will prevail. 

Elements Necessary to Valid General Average. — The elements 
necessary to make a valid claim for general average differ in the 
various countries, but the underlying prmciple is the same in all. 
In the United States it is established that the following circum- 



LOSSES. INTRODUCTION. GENERAL AVERAGE 303 

stances must appear in a case in order that the right to claim 
general average contribution may arise: 

1. The existence or the rapid approach of a peril common to all the 
interests, hull, freight and cargo. 

2. A voluntary sacrifice reasonably made or an extraordinary ex- 
pense justifiably incurred to avert the peril or to save the common 
interests from the effects of the peril. 

3. The preservation of a part of the venture. 

4. Freedom from fault on the part of those interested in the 
venture claiming contribution. 

The Peril and the Sacrifice. — While the number of perils which 
give rise to general average contribution has increased greatly 
since the original Rhodian theory of requiring contribution for 
jettison, the underlying principle governing the right to demand 
contribution has not changed. A peril must exist which it is to 
the advantage of each and every interest in the venture to avoid, 
that is, the peril must be of such a nature that there is impending 
danger of physical injury to the common interest. If a peril of 
this kind exists then volimtary sacrifices which are reasonably 
made in order to avert it, or to free the venture from the probable 
effects of such danger, must be paid fpr by a ratable contribution 
made by all concerned in the venture. These sacrifices may 
consist of the actual destruction or loss of part of the vessel or its 
cargo as in the case of cutting away masts or spars or the jettison 
of goods to relieve the ship. Or they may be consequential dam- 
age resulting from efforts to save the venture as when the engines 
of a steamer or the sails of a ship are subjected to uses of a differ- 
ent nature from those for which they were designed. Thus, if a 
steamer is stranded and in an effort to float the vessel and thus 
save the entire venture, the engines are worked in an imusual 
manner and injured, it seems reasonable that such injury so 
incurred to the machinery should be made good by all the 
interests. In the case of a vessel on fire, water or steam may be 
forced into the hold in an endeavor to extinguish the flame, 
doing damage to cargo which was not touched by the fire. The 
damage to such cargo having been incurred volimtarily, in an 
effort to benefit all concerned, should also be made good. 

The Preservation of Part of the Venture. — It may happen that 
after these voluntary sacrifices have been made the entire ven- 



304 MARINE INSURANCE 

ture will become a total loss. In such a case the sacrifices made 
have accomplished no useful purpose and the cargo destroyed 
has merely met an earlier fate than that which was temporarily 
benefited by the sacrifices. It is, therefore, a rule of general aver- 
age practice that there must result from the sacrifices made the 
saving of a part at least of the venture. At times expenses are 
incurred by the master for the general benefit, which, if reason- 
ably and justifiably incurred must be contributed for. It may 
happen, however, that after such expenses have been incurred or 
disbursements made for the general benefit, that the venture 
will be completely lost. The purpose of general average 
contributions is to work exact justice among the various 
interests exposed to the conmion peril, and it does not seem just 
that the subsequent loss of the venture should shift the burden 
of responding for general average expenses incurred or disburse- 
ments made prior to such loss on to the master or the owner of 
the vessel. The master, during such a time of stress is not alone 
the agent of the owner of the vessel, but is aIso the agent of each 
and every interest involved in the venture, and if acting within 
the bounds of such agency in incurring the expenses or in making 
the disbursements, each interest is bound for its ratable propor- 
tion of such expenses and disbursements based on the values 
existing at the time the expenses were incurred or the disburse- 
ments made. It is possible in many cases for the master or agents 
to insure the amount of their expenses and disbursements against 
the risk of a subsequent loss of the vessel, but such insurance does 
not seem to be obUgatory on the part of the master nor is the 
procurement of such insurance always possible. If the money 
disbursed is raised by the hypothecation of the ship or cargo 
under a bottomry or respondentia bond, then the subsequent 
loss of the vessel will relieve the interests involved from the duty 
of contributing, because the lender, in consideration of the high 
rate of interest received on his loan, assumes the risk of non-pay- 
ment through loss of the venture. In these days of rapid com- 
munication by telegraph the raising of money by bottomry is 
discouraged. 

What is a Voluntary Sacrifice? — While it is essential that the 
sacrifice made be a voluntary one, great latitude is given to the 
meaning of voluntary. It may be that under circumstances of 



LOSSES, INTRODUCTION. GENERAL AVERAGE 305 

peril but a single course is open to the master, which he follows 
intuitively. If, however, in pursuing this natural course the 
vessel and cargo are subjected to hazards of an unusual nature and 
not in the ordinary contemplation of the parties the sacrifice 
will nevertheless be considered as voluntary. Whether the loss 
was reasonably incurred is also considered in the light of the cir- 
cumstances existing at the time. Allowance is made for the fact 
that decisions must be quickly reached when a peril is impending. 
An action taken in the face of a rapidly approaching peril might 
involve unnecessary sacrifice when considered in the light of 
subsequent events, nevertheless if such action was justifiable 
under the circumstances, allowance will be made for the sacrifice 
incurred. However, contribution will not be allowed for sacri- 
fices made if the claimant is in any way willfully responsible for 
such sacrifices. General average was instituted and has been 
continued by the maritime law for the purpose of working equity 
among persons whose interests have been exposed to a common 
peril, some of which have been sacrificed for the saving of the 
rest, and equity cannot be administered where the claimants do 
not come into the adjustment of the loss with clean hands. 

The General Average Adjustment* — General average adjust- 
ments are made as a rule according to the law, customs and 
usages of the port of destination unless otherwise agreed in the 
contract of affreightment as in the case of bills of lading calling 
for adjustment in accordance with York-Antwerp Rules. If the 
voyage is broken up at a port of refuge it is customary to make 
the adjustment in accordance with the law and customs of that 
port unless otherwise agreed in the contract of affreightment. 
Where there is cargo destined for various ports and there is no 
agreement to the contrary, adjustment may be demanded with 
respect to the cargo destined for each port in accordance with 
the law and usages of that port. The adjustment is not made up 
until the arrival of the vessel or cargo at destination. 

Contributory Value of Hull. — The average adjuster having 
obtained the signatures of the interested parties to the general 
average bond and having obtained either underwriters' guarantees 
or cash deposits as security for the bond, proceeds with the com- 
pilation of the facts necessary to fix a proper apportionment of 
the sacrifices made, of the expenses incurred and of monies dis- 



306 MARINE INSURANCE 

bursed. Contribution being made on the net saved value plus 
the amount made good to the interest because of sacrifice made, 
it becomes necessary for the adjusters to fix a valuation of every 
interest concerned in the venture. The vessel is valued at the 
port at which the voyage terminates in her existing condition 
less the cost of any repairs made subsequent to the general average 
act and prior to arrival, which value represents the amount saved 
to the owner by the general average act. It is always a difficult 
matter to determine the real value of a vessel, and the fact that a 
ship when being valued for general average purposes is usually 
in a damaged condition, adds not a little to the difficulty of arriv- 
ing at a fair valuation. Since the amount of payment to be made 
depends on the contributory value, the vessel owner will, as a rule, 
seek to have a low valuation made, whereas the cargo owners 
will natm-ally seek a high value for the vessel so that their con- 
tributions may be correspondingly reduced. As the valuation 
of a vessel may be considered from several angles, such as the 
cost of replacement, her freight-earning capacity or her location 
with respect to possible freight engagements, the situation 
presented is one of no little difficulty. It is customary for the 
adjusters to obtain the certificate of an expert as to the value of 
the vessel. 

Freight Contribution. — Freight contributes on the basis of bill 
of lading freight. If such freight is at the risk of the vessel owner, 
a deduction varying from one-third to one-half is made in the 
United States to ofifset the actual expense of earning the freight 
after the general average act. This deduction is an arbitrary one 
made regardless of the point on the voyage where the act occurred. 
Just as the vessel contributes on the net amount saved by the gen- 
eral average act, so the freight should contribute on the net 
amount of freight saved. It is on this basis that freight con- 
tributes under the York-Antwerp rules and a similar basis of 
value for freight is used under the rules of practice of the Associa- 
tion of Average Adjusters of the United States. If the freight 
is prepaid or guaranteed then as already explained it is in reaUty 
part of the value of the cargo and is included in such value for 
purposes of contribution. The same difficult questions arise 
in regard to freight, in a general average adjustment, as do in 
the insuring of the interest itself, and the same rule applies, 



LOSSES, INTRODUCTION. GENERAL AVERAGE 307 

namely, that he, at whose risk the freight is, is hable for 
contribution in general average. 

Contributory Value of Cargo. — Cargo is valued for purposes of 
general average contribution at its gross wholesale value at the 
port of destination in its then condition, less charges which accrue 
upon arrival, such as freight, duty, cartage, and other necessary 
expenses entering into the wholesale market value at destina- 
tion. This does not, of course, include the cost of insurance, or 
any other charges which have already entered into the cost of 
the goods. To the net value thus determined is added any 
amount made good in general average and there is deducted 
any special charges, arising out of the casualty, that are a lien on 
the particular item of cargo under valuation. 

General Average Cases are Often Complicated. — The adjusters 
receive tenders for the repair of any damage which may have been 
received by the vessel and an apportionment is made of those 
damages which are the result of general average sacrifices and 
those which are the result of ordinary marine perils. It must be 
observed that many times in general average adjustments there is 
a combination of general average losses and disbursements, par- 
ticular average losses and special charges which are incurred 
solely for the benefit of particular interests. This may be illus- 
trated by the case of a vessel which is discovered on fire at sea. 
In order to extinguish the fire and save all the interests con- 
cerned, the hatches will be battened down, the ventilators 
closed and either steam or water turned into the hold in an en- 
deavor to extinguish the fire. If the efforts are successful, it will 
doubtless be found that only part of the cargo in that par- 
ticular hold has been on fire, and that packages not reached by 
the fire, have nevertheless been badly damaged by the effect 
of the steam or the water used in the effort to extinguish the fire. 
In this particular case, the only items for which general average 
contribution would be made are for those portions of the vessel and 
cargo which have suffered by the water or the steam or through the 
efforts made to introduce the water or the steam. and for extraor- 
dinary expenditures incurred in the general interest. The con- 
sequential loss or expenditures due to sacrifice for the general 
benefit, must be made good in proportion to the values saved. 
The actual damage to the ship or cargo by the fire itself or any 



' 



308 MARINE INSURANCE 

expense due solely in consequence thereof is not a general average, 
but a particular average loss or a special charge, for which the 
affected interests alone are responsible. 

Statement of Both General and Particular Average. — The fore- 
going illustration will give some idea of the many and perplexing 
problems with which average adjusters are confronted. The 
average statement does not necessarily confine itself to the gen- 
eral average loss alone, but may also state the particular average 
losses, when this is necessary in order that the general average loss 
may be accurately determined. Furthermore, in the case of a 
severe fire, many cargo interests may become unidentifiable, 
some of which are fire damaged and some merely water damaged. 
It will be apparent that in a general cargo steamer where hun- 
dreds of interests are involved, the adjustment with respect to 
the unidentifiable cargo is a matter requiring considerable care 
and skiQ. Then too in the case of the vessel itself in the event of 
stranding, not voluntary, where the engines have been worked 
in an effort to extricate the vessel, and where the vessel has been 
subjected to many unusual stresses, adjusters are confronted with 
a very difficult problem in determining what damage is the result 
of the stranding itself and at the risk of the vessel and what in- 
juries should be contributed for as sacrifices made in the general 
interest. It sometimes happens that during a single voyage two 
entirely separate general average acts will be made. Because 
of jettisons or possible delivery of cargo at intermediate ports 
reached during the interim between the two sacrifices, the interests 
involved in each case are not the same, leading to complications 
which require the use of all the analytical powers for which 
general average adjusters are noted. 

York-Aiitwerp Rules. — In an effort to reconcile the differences 
in general average practice in the various commercial nations 
The Association for the Reform and Codification of the Law of 
Nations held a meeting at York, England, in 1864 and another 
meeting at Antwerp in 1877, when a code of rules for the stating 
of general average was adopted known as the "York- Antwerp 
Rules." Later on in 1890, the Association again met at Liver- 
pool, where the code was revised and the "York-Antwerp Rulee, 
1890" were promulgated (see appendix, p. 419). This code 
does not pretend to cover the entire field of general average, but 



LOSSES. INTRODUCTION. GENERAL AVERAGE 309 

merely sets down certain definite rules with respect to the ad- 
justment of general average losses arising out of certain specified 
circumstances. 

Provisions for York-Antwerp Adjustments. — ^It is customary 
in bills of lading to provide that adjustment of general average 
shall be made in accordance with the "York-Antwerp Rules, 
1890," and it is also usual to have provision made in insurance 
policies that general average may be so adjusted. In so far, 
however, as the " York- Antwerp Rules" do not apply to the 
particular facts involved, the law applying at the port of destina- 
tion or at the port where by mutual consent the adjustment is 
made, is the law which should determine the mode of adjustment. 

Jettison and Fire. — ^A brief summary of the "York-Antwerp 
Rules, 1890" will throw some light on the sacrifices which are in 
the nature of general average and are so adjusted. The first 
rule in this code provides that "no jettison of deck cargo shall 
be made good in general average." When this rule came to be 
applied, it was quickly perceived that in the case of certain 
trades, such as the lumber trade, where it is customary and 
prudent to carry a considerable portion of the cargo on deck, that 
the enforcement of this rule worked a hardship on the cargo 
owners. Accordingly the practice h$ts arisen in connection 
with trades where by custom cargo is laden on deck, to make 
provision in the contract of affreightment for the amendment 
of the York-Antwerp Rule No. 1 so that the word "no" is 
omitted and contribution is thus allowed for the jettison of such 
deck cargo. If in the ordinary case cargo is jettisoned for the 
general safety, all consequential losses arising from such 
jettison, to the vessel itself or to the other cargo through admis- 
sion of water to the holds on account of the uncovering of the 
hatches to extract the cargo or from any other cause directly 
resulting from the sacrificial act, are admitted in general average. 
So in the case of extinguishing fire on shipboard, where damage 
results from measures taken to extinguish the fire, or through the 
beaching or scuttling of a burning ship, allowance is made for such 
consequential damage. No allowance is made, however, for 
damage directly caused by the fire itself. 

Cutting Away Wreck. Stranding. — Where a vessel has been 
partially wrecked by a sea peril and portions of the spars remain, 



310 MARINE INSURANCE 

the cutting away of these remnants is not allowed for in general 
average under the York-Antwerp Rules. Under the law of the 
United States, however, allowance would be made for such 
parts cut away, if there would have been a reasonable chance, 
but for the continuance of the storm, of saving the parts and if 
saved, they would have been of some value. Rule No. 5, of the 
York-Antwerp Code provides that if a vessel is voluntarily stranded 
under circumstances where if such course were not adopted it 
would inevitably sink, or drive on shore or on the rocks, no aUow- 
ance shall be made for loss or damage to ship, cargo or freight, 
but that in all other cases of voluntary stranding for the common 
safety the consequential loss or damage shall be allowed as general 
average. The restriction in this rule with respect to voluntary 
stranding when a vessel is in inevitable danger of being sunk 
or driven on the shore or on rocks is not in agreement with the 
law in the United States where it is suflScient to establish a case 
for contribution in general average, to show that the vessel was 
selected to make a voluntary sacrifice for the purpose of saving 
the remainder of the associated interests. The fact that the 
vessel would apparently in any event have been lost does not 
destroy the right of the vessel to recover contribution from the 
cargo if it be saved because of the sacrifice of the vessel. The 
possibiUty always remains that through some unexpected cir- 
cumstance, the vessel if not voluntarily stranded might have 
been saved. 

Injury to Engines or Sails. — The York-Antwerp Rules provide 
that allowance is to be made for damage caused to the sails of a 
vessel or to the engines of a steamer or vessel propelled by me- 
chanical power, when such damage is the result of efforts made to 
float a stranded ship. To aid in floating a vessel which is ashore, 
it is usual to discharge into Ughters, her fuel, cargo and stores in 
order to Ughten her. The cost of such extra handling, lighter 
hire and reshipment of goods is admitted as general average. 
If a steamer when leaving her port of departure is adequately 
equipped with fuel for the prosecution of the proposed voyage, 
but because of perils encountered or other fortuitous conditions, 
so much is burned that she runs short of fuel and in order to 
bring the entire venture safely to destination the ship's stores or 
parts of the vessel or cargo are burned to produce power, or the 



LOSSES, INTRODUCTION, GENERAL AVERAGE 311 

vessel is necessitated to make a port of refuge to obtain a supply 
of fuel, such extraordinary sacrifices and expenses are treated 
as general average. Unusual expenses incurred at a port of 
refuge for the common interest are general average expenses and 
the wages and maintenance of the crew in such port of refuge 
are also contributed for. When damage is suflfered by cargo 
in the act of discharging, storing, reloading and stowing because 
of a general average act, such damage is contributed for, only 
when the cost of these measures respectively is admitted as 
general average. 

Thirds Off. Separation of General and Particular Average. — 
When repairing damages which were caused to vessels through 
general average sacrifices, it was formerly the custom to deduct 
one-third from the cost of such repairs, on the principle that new 
material was being supplied for old. The injustice of this in the 
case of new vessels and in the case of metal vessels was so appar- 
ent that Rule No. 13 of the York-Antwerp Code provides a 
definite scale for such deductions. It is necessary for average 
adjusters to exercise the greatest care to allow in general average 
only such repairs to vessels as are the result of the general average 
act, charging against the owner such repairs as are made nec- 
essary by injury suffered through marine perils. When tem- 
porary repairs are made to a vessel no deduction of thirds is 
made as the temporary repairs are of no permanent benefit to 
the owner of the vessel. 

Freight. — If the freight is not prepaid and therefore is not a 
part of the value of the goods, it also is an interest involved 
in the general average sacrifice. The amount which is made 
good to freight and the amount of and the value at which the 
freight is made a contributing interest are outlined in the York- 
Antwerp Rules. It must be remembered, however, that if the 
bill of lading does not provide for an adjustment in accordance 
with York-Antwerp Rules, the statement is drawn up in accord- 
ance with the law prevailing at the port of destination, unless 
there is some other custom in vogue. Thus, in the case of general 
average sacrifices in connection with vessels from the United 
States bound for ports in the West India Islands, it is usual 
to have the adjustment made in the United States, in accordance 
with the law of the port of departure. 



312 MARINE INSURANCE 

Border-line Cases. — It will be found that the laws of the 
various nations differ materially in certain respects from each 
other and from the rules promulgated under "York-Antwerp 
Rules 1890." Enough, however, has been mentioned in the 
foregoing outline to indicate the many and difficult problems 
with which an average adjuster has to deal. Many cases will 
be on the border line, where it will be a matter of opinion whether 
or not the sacrifices made and the expenses incurred are in the 
nature of general average. The determination of these questions 
to the satisfaction of all parties interested is one requiring the 
use of great skill and tact. Each underwriter who is interested 
in the venture and upon whom the liability for the general average 
contribution falls, carefully scrutinizes the general average adjust- 
ment when issued, to determine whether or not in his opinion, 
the assessments and allowances made are just and in accordance 
with law or the rules of practice, in view of the statement of the 
facts in the case as set forth at the beginning of the general 
average statement. Sometimes years are taken in the final settle- 
ment of a case, during which time the expenses of the average 
adjusters are steadily growing. Finally, however, the adjustment 
is completed and the settlements are made, and in so far as it is 
humanly possible, exact justice is done to all the interests 
involved. 



CHAPTER 19 
PARTICULAR AVERAGE 

Most Claims are for Partial Loss. — The second class into which 
losses may be grouped is particular average. This class includes 
in number and, perhaps in actual financial loss suffered, the 
largest portion of marine losses. It is the cumulative effect of 
the vast number of particular average claims presented to an 
underwriter that determines success or failure for his operations. 
General average claims while important and troublesome are as a 
rule not sufficient in volume to have a material effect on the out- 
come of underwriting operations, the net loss after adjustment 
as a rule being a comparatively small percentage of the value at 
risk. Likewise, total losses, involving as they do in many cases 
the loss of large values are fortunately few when the total number 
of losses incurred in a given period is considered. This fact is 
perhaps best shown by the low rates charged for marine risks 
when compared with the relatively high rates charged for war 
risks, since losses arising out of the latter class of perils usually 
result in total or constructive total losses. It may therefore be 
said with considerable assurance that the field of particular 
average is where the real struggle of marine insurance takes 
place. 

Partictilar Average Refers to a Special Interest. — ^Phillips 
(Section 1422) defines particular average as "a loss borne wholly 
by the party upon whose property it takes place, and is so called 
in distinction from a general average for which diverse parties 
contribute. '' A particular average should be distinguished from 
the total loss of a part which may occur when a shipment consists 
of various units as, for instance, when out of a shipment of 50 
bars of copper one is lost during transhipment, or out of a lot of 
50 bales of cotton one is totally destroyed by fire. This is not in 
the true sense a particular average loss but is a total loss of an inte- 
gral part of the entire shipment. Particular average has reference 
primarily to damage or loss which is suffered by a particular in- 

313 



314 MARINE INSURANCE 

terest or by part of it, which destroys less than the total value 
of the particular interest, or the part of the particular interest 
involved. It should, however, be observed in this connection 
that a particular average may attain such a percentage of the 
total value involved, that the assured may, by exercising the right 
of abandonment, convert such particular average into a construc- 
tive total loss. The consideration of this phase of the subject 
will be deferred to the following chapter. The adjustment of the 
total loss of part of a shipment is comparatively a simple matter. 
If the amount of insurance on that particular part is ascertained, 
then the underwriter's UabiUty is fixed and determined and he 
pays this sum plus whatever charges may accrue in the adjusting 
of the loss. 

Particular Charges. — Particular average must be distinguished 
from the particular charges which are incurred under the sanction 
and requirement of the Sue and Labor clause, which appears in 
marine poUcies. These charges may be incurred in cases where 
there is no resultant damage to the property involved, the 
expenditures made having resulted in the prevention of damage 
to the property. On the other hand, after the incurring of 
such charges the vessel or cargo may become a total loss. Never- 
theless the underwriter remains Uable for these charges, in such 
cases paying more than a total loss under his poUcy. Whether 
or not the property be damaged these charges are not particular 
average, but are special charges recoverable irrespective of the 
question of franchise under the ''Sue and Labor" clause and not 
under the "Perils" clause. It must appear in support of such 
claim that the expenses incurred arose out of an endeavor to 
preserve the particular interest from a peril insured against under 
the policy. 

Comparison of Gross Sound and Damaged Values. — The 
adjustment of a particular average caused by damage, however, 
is more difficult and is determined by ascertaining what the per- 
centage of depreciation is on the goods. This is done by com- 
paring their gross sound value with their gross damaged value 
as fixed in the open market. When this precentage is found, 
it is applied to the insured amount under the policy and settle- 
ment of loss is made accordingly. There is added to this sum 
whatever expenses may have been incurred in connection with 



PARTICULAR AVERAGE 315 

the settlement of the loss. It will be pertinent at this point to 
direct attention again to the fact that in marine insurance 
unlike ordinary fire insurance, the underwriter is merely a co- 
insurer of the property with the assured if the latter has not 
insured his property in full, and a particular average no matter 
how small will be adjusted by applying the percentage of deprecia- 
tion to the amount insured on the damaged property. If the 
amount insured is less than the real value of the goods the assured 
will assume the loss on the difference himself. If, on the other 
hand, the goods are insured for more than their real value the 
assured will recover more than the loss suffered. Here again 
marine insurance differs from fire insurance in that under a fire 
policy recovery under the standard form of policy is limited 
to the actual loss suffered. A merchant importing goods will 
often discover, when an adjustment of particular average is made, 
that through neglect to insure collectible freight and duty he 
has become a co-insurer with his underwriter for a considerable 
amount. It should be noted that the marine underwriter assumes 
in full the expenses incident to the adjustment of the loss. 

Comparison of Gross Values Justified. — In determining the 
percentage of loss suffered, the values taken for comparison are 
the gross values at destination; that is, the market values of the 
sound and damaged portions are compared. These values 
include the freight, duty and charges which have been incurred 
in order to place the particular goods in that particular market. 
If the comparison were made on net values, that is, the invoice 
value of the goods less the freight and other charges accruing, the 
adjustment would work an injustice. As an illustration, a 
shipment of cotton print goods imported from Liverpool to New 
York may be taken. In sound condition, these goods would have 
a market value of say $5,000, but in the damaged condition in 
which they arrive are worth only $2,500 in the New York market, 
showing a depreciation of 50 percent. Let it be assumed that 
in the sound value of $5,000, there is an amount of $1,000 which 
represents the charges incurred in order to place the goods in 
the New York market such as freight, duty and insurance. This 
$1 ,000 will accrue whether the goods arrive in a sound or a damaged 
condition. If the net values were compared the sound value 
would be $4,000 ($5,000 less $1,000) while the damaged value 



316 



MARINE INSURANCE 



net would only be $1500 (S2500 less $1000 the cost of placing 
the goods in the market) thus showing a depreciation of 62J^ 
percent, which would be applied to the insured value in the policy. 
Let it be assumed that the goods are insured for 10 percent over 
their value or $5500 and the adjustments under the gross and 
net basis would appear as follows: 




Net basis 



10 cases cotton print goods c.i.f. in- 
voice value $5000 

Plus 10 percent 500 

Insured value 

Insured subject to 5 percent particu- 
lar average. Therefore amount 
necessary for claim $275 

Market value at New York 

Market value in damaged condition . 

Depreciation 

Insured value $5500 

Add adjusting charges incurred, such 
as auctioneer's commission, ap- 
praiser's fee, advertising, etc . . . . 

Total amount of particular average 
loss 



$5500 



$5500 



$5000 
2500 



$2500 or 50% 
@50%=$2750 



25 



$2775 



$4000 
1500 



$2500or 62H% 
@62K% =$3437.50 



25.00 



$3462 . 50 



Comparison of Net Values Unfair. — It will appear from the 
foregoing illustration that an adjustment based on any comparison 
other than that of gross market values is unfair, in that the 
assured gains an undue advantage by a comparison which shows 
a percentage of depreciation greater than that actually sufifered. 
The values at the place of destination of both the sound and 
damaged goods are the market values which naturally include 
the reasonable expenses necessary to deliver the goods at such 
place, but are, of course, affected by the law of supply and demand. 



PARTICULAR AVERAGE 317 

Freight and Duty. — ^In applying the percentage of depreciation 
determined by the foregoing comparison, the question arises as 
to what is the insured value against which the determined per- 
centage of depreciation is to be applied. If there are charges of 
freight and duty accruing at the port or place of destination 
these charges will not be included in the insured value unless 
there is special provision in the policy providing for the insurance 
of such amounts. As the determination of the percentage of 
depreciation is made by a comparison of values after such charges 
have been paid, it will be manifest that a careless assured may 
unwittingly become his own insurer for a considerable portion 
of the landed value of the goods. It is customary, as already 
indicated in a previous chapter, to insure the items of collectible 
freight and duty. In making the adjustment of particular 
average in such cases there is added to the amount insured on 
goods, the amount of these two items, and the percentage of 
depreciation is applied to this gross amount, so that the insured 
may receive fuU indemnity for the loss incurred. 

Policy Value Controls. — It must be borne in mind, how- 
ever, that both the underwriter and the assured are bound 
by the valuation expressed in the policy, whether this value 
be high or low when compared with the true market value. 
The only time when such a valuation can be called into 
question is in the event of an exceedingly high value where evi- 
dence appears indicating that the valuation was made with 
fraudulent intent. 

Determining Depreciation by Appraisal. — In the adjustment of 
particular average losses on goods where the amounts and 
quantities involved are not large, it is customary to arrive at the 
percentage of loss by appraisal rather than by sale in the open 
market. If the assured and the underwriter's representative 
can come to an agreement regarding the percentage of loss, that 
percentage is applied to the insured value and the adjustment so 
made. If, however, the assured and the underwriter's repre- 
sentative cannot agree, then it is customary to send the goods to 
public auction and have them sold there. The expenses attend- 
ing such sales are a charge against the underwriter, as in the 
illustration cited above showing these charges added to the loss 
in the adjustment. 

22 



318 MARINE INSURANCE 

Salvage Losses. — If no question is raised as to the insured 
value, so that the question of co-insurance on the part of the 
assured does not enter into consideration, an underwriter, when 
goods are sent to auction, may pay for them as for a total loss, 
and take an assignment of the damaged goods receiving the 
proceeds of the auction sale as salvage against this total loss. 
In other cases the assured receives the proceeds of the auction, 
and the underwriter pays the difference, between the amount so 
received less the expenses incurred in the sale, and the insured 
amount. So when goods are sold at a port short of destination, 
adjustment is made either by the payment of a total loss, the 
underwriter taking the proceeds, or by the payment of the 
difference between the insured value and the proceeds. In all 
such cases the percentage of depreciation is not considered, and 
the loss is known as a salvage loss. 

Certificate of Damage. — Where goods arrive at a foreign port 
in a damaged condition, it is customary to call in the under- 
writer's representative, if there be one at the port of destination, 
in order that he may make an appraisal of the damaged property. 
If the underwriter has no representative, a Lloyd's surveyor 
or other competent appraiser will be appointed to make a survey 
and appraisafof the property. Where no experienced appraiser 
is available, two reputable merchants of the town, familiar 
with the class of goods under consideration, are often called upon 
to give their opinion of the percentage of damage sustained by 
the goods. A certificate setting forth the cause of the damage 
and the amount thereof is then issued by the appraisers, which 
certificate is attached to the other papers in the case and for- 
warded to the nearest point where the certificate or policy of 
insurance provides for payment of loss. Of course, if the ap- 
praiser called in cannot make an amicable adjustment of the 
loss, it is always possible to have the damaged goods sold in the 
open market, and the loss suffered thus determined. As has 
already been suggested, however, this method of determining the 
extent of loss is in many places disastrous to the underwriter in 
that through collusion there is little competitive bidding at these 
sales. 

Special Adjustments. — Where there are different articles in- 
sured under a policy and the separate values of these different 



PARTICULAR AVERAGE 319 

articles are ascertainable, it is customary and proper to adjust 
particular average losses on each kind of goods separately, 
determining the percentage of damage suffered by each com- 
modity and applying this percentage to the insured value of 
that particular commodity. In the case of goods which ordi- 
narily are subject to leakage or loss or gain in weight, it is also 
customary and proper to first make allowance for such ordinary 
variation, adjusting the particular average on the remainder. 

Effect of Average Clauses. — It will be observed that much of 
the work of underwriting resolves itself about the question of 
inserting clauses in the policy relating to particular average 
losses. The memorandum clause sets forth in considerable 
detail the percentage of damage which must be attained on 
various articles before claim may be made under the poUcy. 
Various other clauses are used in fixing the average franchises on 
particular commodities or in changing the franchises which are 
enumerated in the memorandum clause. These clauses come 
into play when a particular average adjustment is to be made. 
The percentage of damage havmg been determined, reference is 
made to the poUcy to see what the franchise is. Unless the 
percentage of loss equals or exceeds the franchise, there is no 
liabiUty under the poUcy. If, however, the percentage of loss 
equals or exceeds the franchise, the loss is then paid in full. On 
the other hand, with an average clause containing a deductible 
franchise, unless the percentage or amount of the loss exceeds 
the deductible franchise, there wiQ be no Uability under the policy. 
The only particular average liability which ever exists in such 
cases is the liability in excess of the deductible franchise, whether 
this franchise is expressed as a percentage or as a fixed sum. 

Cause of Loss. — ^The question of franchise, however, is not the 
only question raised by average clauses. There is the further 
consideration of the cause of loss. As pointed out in a previous 
chapter it is not every loss that is covered by a poUcy of marine 
insurance, but only those that are the direct result of the perils 
eniunerated or of others of the same nature. The broad pro- 
tection granted by the policy is, in many cases, modified by 
average clauses, which limit recovery, for instance, to losses 
caused by stranding, sinking, burning or collision. The cause 
of damage is ordinarily the first inquiry in loss cases, and if the 



320 MARINE INSURANCE 

loss is not occasioned by a peril insured against, no further action 
is taken. The cause of loss is not always easy to determine, as 
cargo which has been carried for long distances may be discharged 
in damaged condition without any apparent sea peril having 
intervened. In such cases test is usually made to determine 
whether the damage is the result of fresh or salt water, and if 
traces of salt appear further search is made for possible leaks 
in the deck or shell of the vessel. Even this loss may be found 
to be due to fault on the part of the ship, and therefore not 
recoverable under the policy. 

Particular Average on Profits and Commissions. — Partial losses 
on profits and commissions and other interests which are incre- 
ments growing out of the transactions involving the shipment of 
the goods, are settled on the same basis as is the loss on the goods 
themselves. The only question involved in such cases is whether 
or not there was a profit lost or a commission lost. The solution 
of this question is not always an easy one, as at the time of plac- 
ing insurance on profits, an actual profit may have existed, 
whereas at the time of the arrival of the goods market conditions 
may have so changed that the apparent profit has disappeared. 
If the goods had arrived in a sound condition the assured would 
have had no profit and the question is naturally raised, should 
the mere fact of the goods arriving in a damaged condition enable 
the assured to recover a loss under a profit insurance which 
actually was not suffered. Some underwriters take the position 
that having accepted premimn for the insurance of a profit which 
at the time actually did exist, they should respond in any event 
under such insurance if loss occurs. This position would seem to 
harmonize with the marine insurance theory of reimbursing the 
assured for loss on the insured value even if this amount exceeds 
the true value. 

Particular Average on Hull. — Particular average losses on hull 
and machinery present many problems pecuUar to this class of 
risk. There is a gradual and continual depreciation taking place 
in the structure and fabric of a vessel, which although perhaps 
imperceptible is nevertheless present. In the event of an acci- 
dent occurring to the vessel, the question will often arise whether 
certain damage existing is the result of the casualty or of gradual 
deterioration known as "wear and tear." Such loss, while 



PARTICULAR AVERAGE 321 

undoubtedly a partial loss of the vessel is not particular average, 
at least in so far as the perils insured against are concerned. In 
many cases it is necessary in effecting repairs to remove portions 
of the fabric of the ship replacing the old with new material. 
Since it is not always possible to separate the "wear and tear" 
from the casualty damage, the custom has grown as already ex- 
plained of deducting *' thirds new for old" to offset the replace- 
ment of "wear and tear" deterioration. It is important to 
understand how and where in the adjustment of particular aver- 
age on hull, credit is taken for this "one-third" or such modified 
percentage as may have been named in the policy. It will be 
observed that the old material taken out of the vessel is of some 
value as scrap. This value is ordinarily determined by selling 
the old material. Question then arises as to whether or not 
credit for this old material should be taken in the adjustment 
before or after the deduction of one-third is made. Naturally 
it will be to the advantage of the assured if the deduction is first 
made and the " thirds " deducted from the remainder. However, 
this is not the method ordinarily followed, the prevailing rule 
being that the "thirds" are first deducted, credit then being taken 
for the value of the old material. The final result is the amount 
for which the underwriters must respond, each in proportion to 
the percentage of insured value for which he is liable. 

Apportionment of Expenses. — It is not at all unusual to find 
that in cases where a vessel is sent to the repair yard to restore 
damage caused by perils insured against, that the owners will 
take advantage of the opportunity to make repairs or alterations 
which are solely for the owner's account and in which the under- 
writers are not interested. Certain charges, aa for dry docking, 
are, of course, of mutual benefit to both underwriters and owners 
in such cases and some fair apportionment of these expenses 
should be made. Where, however, the repair work being done 
is solely for underwriters' account, the necessary expenses inci- 
dental to the repairs are included in the adjustment and paid by 
the underwriters. 

Temporary Repairs. — It frequently happens that temporary 
repairs are made at a port of refuge, either because it is not 
practicable to effect permanent repairs, or because an ultimate 
saving can be effected by making sufficient repairs to enable the 



322 MARINE INSURANCE 

vessel to proceed under a certificate of seaworthiness to a port 
where the permanent repairs can be readily and more cheaply 
made. In such cases the cost of the temporary repairs are borne 
by the tmderwriters, it being assmned that such repairs have 
been reasonably and prudently made. Where, however, the 
owner desires temporary repairs made solely because of the 
delay involved in obtaining new parts, or because of the difficulty 
of obtaining the use of a dry dock at the port where the vessel then 
is, there would seem to be no reason why the underwriters should 
be interested in the cost of such temporary repairs. The under- 
writers on hull are not interested primarily in the prompt repair 
of damage; their obligation is merely to make good to the assured 
damage suffered, or to repair for his account such damage with 
reasonable diUgence. If the owner, in order to obtain quickly 
the use of his vessel, desires to incur unusual expense to effect 
such end, these extraordinary expense must be borne solely 
by him. 

Valuation of Hulls. — ^Attention has already been directed to 
the importance of inserting a fair valuation for vessels in poUcies 
covering particular average losses on hull and machinery. The 
necessity for this becomes apparent in the adjustment of particular 
average claims. An underwriter being bound by the valuation 
expressed in the policy, if made in good faith, whether this valua- 
tion be high or low, becomes responsible for the percentage of 
particular average which the amount insured under his policy 
bears to the value of the vessel as stated therein, subject, of course, 
to the average franchises and other conditions of the poUcy. 
Thus on a low^valued vessel he assumes a relatively greater pro- 
portion of loss than in the case of a high-valued vessel. 

Cause of Damage to Hulls. — ^As in the case of particular 
average on cargo, the cause of loss is a subject of pertinent inquiry 
in connection with claims on hull and machinery. In many 
instances the cause of loss is apparent, but in others, especially 
in connection with steamers or other mechanically propelled 
vessels, many and serious losses occur without any apparent or 
unusual conditions having been encountered during the voyage. 
Propeller blades will be lost, stern frames will be fractured, 
and accidents wiU overtake the machinery without any usual 
strain being noticed. In such cases, it often becomes difficult to 



PARTICULAR AVERAGE 323 

determine whether or not the damage is due to latent defect or to 
the action of some external force. Obviously, if the policy, as is 
usual, contains the "Inchmaree" clause the question is of less 
importance, but even when this clause is used many perplex- 
ing problems arise with respect to particular average claims. 

Partial Loss of Freight. — Partial losses on freight present a 
more difficult problem, freight not being a tangible interest, but 
one which is dependent on both the cargo and the ship. It 
therefore follows that a partial loss of freight may result because 
of loss to ship or cargo or to both. Partial loss on this interest 
can be determined only by reference to the goods and the vessel. 
It will be interesting to observe a few of the ways in which a 
total loss of part or a particular average may arise on the interest 
of freight. In a poUcy on freight where the freight is at the risk 
of the ship and the amount insured under the policy is divisible 
into parts, as, for instance, in the case of a poUcy covering a 
voyage consisting of two or more sections, each of which is 
severable and the amount of freight appUcable to each section is 
determinable, if in this case the ship is lost after one or more 
sections of the voyage are completed, then there will be a total 
loss of part of the freight equalUng the amount of the unearned 
portion of the freight contract. 

Collectible Freight. — If the bill of lading freight is collectible 
at destination and through perils insured against part of the 
cargo is lost, or a portion of the cargo, because of damage cannot 
be deUvered in specie and the vessel is thus prevented from^earn- 
ing the freight on this particular portion of the cargo, a total loss 
of part of the freight will result. Where through the occurrence 
of perils insured against the voyage is broken up by mutual 
consent short of the port or place of destination and freight pro 
rata itineris peracti is paid, the difference between the amount so 
paid and the gross freight at risk is a particular average on freight. 

Substitution of Vessel or Cargo. — If, in the event of a vessel 
making a port of refuge and being unable to prosecute the voyage, 
another vessel is obtainable to complete the voyage at a less cost 
than the gross freight at risk, the vessel owner is obUgated, if 
possible, to make such substitution. In such a case, there is a 
particular average on freight equal to the cost of hiring the new 
vessel. A freight loss of this character is known as a salvage loss. 



324 MARINE INSURANCE 

When the whole cargo is lost without the loss of the vessel itself 
and another cargo is taken at the same port, intended for the 
original destination, the loss, if any, on the freight is again a 
salvage loss and is the dijfference between the original freight and 
the new freight. This rule will hold good only in case the sub- 
stituted cargo is to be carried to the same port as was the original 
cargo, otherwise there will be an abandonment of the voyage. 
The substitution of an entirely new voyage will result in the total 
loss of freight on the original cargo. 

Freight Not Always Involved in Damage to Ship or Cargo. — 
While the determination of a partial loss of freight is dependent 
on what happens to the ship or cargo, it does not follow that 
because there is a particular average loss on vessel or cargo, that 
there will necessarily be a particular average loss on freight. 
In fact, the reverse is more often true. Many partial losses wiQ 
be suffered by cargo, where the freight will in no wise be affected 
and the same is true in the case of particular average on hull. 
A partial loss on freight is more apt to result in connection with 
the total loss of a part of the cargo, or in connection with a 
partial or total loss affecting the vessel which results in the 
breaking up of the voyage. Cargo delivered in a damaged con- 
dition but still in specie, of course, must pay full freight to the vessel 
and consequently no particular average on freight accompanies 
the particular average on cargo. The freight so paid as in the 
case of prepaid or guaranteed freight becomes part of the value of 
the goods and as previously indicated, if insured by the cargo 
owner, enters into the adjustment of the particular average on 
cargo. In the event of disaster the master is bound to use 
every reasonable effort to carry cargo forward to destination 
either in his own vessel, or if procurable in a substituted vessel, 
and if he, through neglect, fails to do this and there results a 
particular average on freight, the underwriter on freight will 
not be liable for such loss. 

Protest of Master. — In order to establish a vaUd claim under 
a poUcy of marine insurance in its ordinary form, it is necessary 
to prove that some fortuitous accident has overtaken the vessel, 
or that the damage suffered has resulted from causes beyond 
the control of the master or the owner of the cargo. Since 
the underwriter assumes Uability only for damages occurring 



PARTICULAR AVERAGE 325 

through the fortuitous causes enumerated specifically in the 
policy and from other causes of like nature, and not all damage 
irrespective of cause, docmnentary evidence showing the occur- 
rence of such peril or of the existence of fortuitous circumstances 
which might readily have caused the damage may be demanded 
by the underwriter. Such evidence is ordinarily furnished 
in one of two ways. Reference is made either to the log book 
of the vessel showing that accident overtook it, or that heavy 
weather or other fortuitous circumstances were encountered 
during the voyage, or preferably the evidence is set forth in a 
docmnent called the master's protest. In this document, the 
master of the vessel, under oath, sets torth the events of the 
voyage, stating particularly the circumstances under which the 
damage suffered is alleged to have occiu-red or might have oc- 
cured and protesting against the master or the vessel being held 
responsible for such loss. This document serves a double purpose 
in establishing the facts of the casualty and also in reUeving the 
vessel prima fade from Uability for the damage. 

Proofs of Loss. — It is necessary also in order to establish a 
vaUd claim for loss on cargo that certain documents be produced, 
showing that the right to receive payment of loss on the property 
is vested in the claimant. The documents necessary to so es- 
tabUsh the claim are the following, viz. : 

1. The bill of lading for the goods, which is the ship's receipt showing 
that the goods in question were actually on board the vessel which has 
met with disaster or on which damage is alleged to have overtaken the 
goods. Owing to the fact that short shipments frequently occur after 
the bill of lading has been issued, it is always prudent to have the 
transportation company confirm that the goods were actually laden on 
the vessel named in the bill of lading. 

2. The invoice must be produced, which shows the value of the goods 
and the accruing charges. From this document the underwriter is 
enabled to determine whether or not the amount reported for insurance 
is the simi for which he assumes responsibility under the policy. 

3. The insurance policy or the certificate of insurance, if one has 
been issued, must be produced. This document proves the insurance 
and also establishes to whom payment of loss is to be made. 

Duplicate Documents. — If the insurance certificate has been 
issued in duplicate both documents should be surrendered. If 



326 MARINE INSURANCE 

this is not practicable, indemnity may be taken against the pos- 
sibility of other claimants appearing with duplicate documents. 
These documents being negotiable merely by endorsement, the 
necessity for this precaution will be apparent. If a survey 
and appraisal of the damaged property has been made the 
certificate of the surveyor and appraiser will also accompany 
the loss documents. 

Certificate of Enrollment. — In the case of a total loss on hull, 
a further document is required, known as the certificate of 
enrollment, proving by governmental document, the ownership 
of the vessel. It is also proper in the case of loss on freight to 
demand the production of the freight list or the charter party, 
in order to prove the amount of freight which was at risk. 



CHAPTER 20 

TOTAL AND CONSTRUCTIVE TOTAL LOSSES. WAR 

LOSSES 

Definition. — A total loss is defined by Phillips, Section 1485 
and 1486 as one wherein the subject of an insurance, "by the 
perils insured against, is destroyed or so injured as to be of trifling 
or no value to the assured for the purposes and uses for which it 
was intended, or is taken out of the possession or control of the 
assured, whereby he is deprived of it; or where the voyage or 
adventure for which the insurance is made is otherwise broken 
up by the perils insured against. In a total loss the assured 
IS entitled to recover from the underwriter the whole amount 
insured by the policy on the subject so lost." 

Constructive Total Loss. — A constructive or technical total 
loss on the other hand is one in which the property has not 
actually become a total loss, but has been so injured that the 
part or remnant remaining is impossible of repair at a cost less 
than the value of the repaired subject, or if not badly injured 
is in a position of such difficulty from the viewpoint of salvage, 
that the cost of recovering it would equal or exceed its value 
when recovered. A technical total loss may result, however, 
by agreement or by implication of law when property is damaged 
beyond a fixed percentage of its value. 

Adjustment May be Simple. — In many cases the adjustment 
of a total loss claim is a simple matter, as where a vessel is in 
collision and sunk on the high seas, with no part of her value re- 
maining and with no possibiUty of recovery of the vessel through 
the exercise of salvage operations. While such cases are more 
or less frequent, it is quite often the case that a disaster overtak- 
ing the vessel will present the question as to whether or not there 
is such a destruction as will warrant the assumption of total loss 
and settlement on that basis. 

Assured Must Endeavor to Preserve Property. — It is the duty 
of an assured by implication of law and by contract under the 

327 



328 MARINE INSURANCE 

Sue and Labor clause to use the utmost endeavor in the event 
of casualty overtaking his property to preserve it and to prevent 
its becoming absolutely worthless. The measure of duty that is 
placed upon him in this respect, is that measure which a prudent 
uninsured owner would exercise under similar circimistances. 
The mere fact that the assured has an insurance policy under 
which he may obtain indemnity for his loss is no valid reason why 
he should not exercise the same care and diligence in preserving 
and recovering the property as would be the case were the loss to 
fall directly on him. This point of view is too often over- 
looked by the assm*ed, with unfortunate consequences to the 
underwriter. It is primarily for this purpose that the Sue and 
Labor clause is inserted in poHcies thus converting into an express 
obUgation under the policy that which existed as a duty implied 
by law, and requiring that the assured use due diligence in taking 
measures for the saving and preserving of the damaged property. 

When Is a Thing Lost? — The question arises in many cases 
whether or not a thing is lost. A vessel may strike on a rock, 
and filling with water sink, but in such a position as to make 
easy and comparatively inexpensive, operations for the raising 
and repair of the vessel. In such case it cannot be said that the 
vessel is lost. Or again, a ship may be on fire and partially burnt. 
In order to extinguish the fire, the vessel may be flooded to such 
an extent that it settles on the botton, but the cost of pumping 
out and floating the vessel and repairing the fire and water 
damage may represent but a small percentage of the total value 
saved. In such a case it cannot be said that the vessel is a total 
loss. The same rule applies to cargo. However, whether or not 
under similar circumstance damage to goods will result in a 
total loss depends in large degree on whether or not the cargo is 
perishable. A vessel, sUghtly injured in coUision, but sunk, 
may result in the total destruction of the cargo if it be susceptible 
to rapid disintegration by water as in the case of a sugar cargo. 
On the other hand, a vessel so badly injured by collision or so 
badly ashore as to make salvage operations on the vessel imprac- 
tical may result in but little injury or expense in connection with 
a non-perishable cargo such as pig copper. 

When Does a Constructive Total Loss Occur? — The fact re- 
mains, however, that a vessel or its cargo may not be an actual 



TOTAL LOSSES 329 

-total loss and yet be so badly damaged or in such position of diffi- 
culty that the cost of repairing or the cost of extricating the vessel 
or the cargo from its position, will be so great that a prudent unin- 
sured owner would not imdertake any salvage operations on the 
damaged vessel or its cargo. In such a case he would conclude 
that the cost of extricating the vessel and cargo from their difficult 
position and of making the necessary repairs which would restore 
the vessel to her former condition and the cost of reconditioning 
the cargo to make it salable, would exceed the cost of the vessel 
and cargo when so restored. If this state of facts appears, it is 
proper for the assured to tender abandonment of the vessel and 
cargo to the underwriters and claim for a total loss under the 
name of a Constructive or Technical Total Loss. It will be 
evident that in many cases the conclusion arrived at is based on 
supposition rather than on fact, but if the conclusion reached 
as to constructive total loss is a reasonable one in the Ught of 
existing facts, even though subsequent events prove this conclu- 
sion to have been erroneous, the parties will be bound by the 
judgment reached and mutually accepted. 

American and English Practice Differs. — One of the greatest 
differences between marine insurance practice in this country and 
in England is found in connection with the subject of construct- 
ive total loss. Under the English practice, unless a vessel is 
so badly damaged that the cost of salving and repairing it would 
equal or exceed the value of the vessel when repaired, the insured 
value being assumed to be the repaired value, no claim can be 
made for a constructive total loss. On the other hand, a rule 
has been in force in the United States which is more favorable to 
the assured and provides that in the event of a vessel being 
damaged to such an extent that the cost of salvage and of 
repair will exceed fifty percent (50 %) of the repaired value, 
circumstances exist under which the assured may claim as for 
a constructive total loss. The theory of constructive total loss 
applies both in England and the United States not only to 
damaged hulls, but also to damaged cargo or loss of freight. In 
connection with the insurance of hulls since the adoption of stand- 
ard forms for use both in the English and American markets, 
the English custom has gained ground and a clause to this effect 
now appears in most hull forms used in America. The English 



330 MARINE INSURANCE 

theory seems the more logical as a basis for underwriting, the 
desire of underwriters being to discourage rather than to invite 
abandonment. 

Abandonment. — ^The subject of abandonment which arises 
in connection with constructive total loss is one of great difficulty 
and presents many perplexing problems to both underwriter 
and assured. The practice is an old one and there is no definite 
set of rules governing the tender or acceptance of abandonment. 
In the case of an absolute total loss, where there is no possibility 
of saving or of repairing the vessel, it is not necessary for an 
assured to abandon in order to claim a total loss. It is customary, 
however, for underwriters to take assignment of the property 
on payment of the total loss. Where there is not an absolute 
total loss, if the assured would exercise the right to claim from 
his underwriters, as for a constructive total loss, he must tender 
abandonment to his underwriters. 

Tender of Abandonment. — In this tender the assiu-ed must set 
forth the facts upon which he bases his allegation that the vessel 
is in such condition that a prudent uninsured owner would not 
deem it wise to undertake to save and repair the vessel. If the 
interest insured be freight or cargo, a similar condition must be 
shown to exist. No special form of abandonment is required 
and no special form of acceptance by the underwriter is provided. 
When abandonment is tendered and accepted, the underwriter 
pays the full insured value and takes the remnant of the property 
as it is, subject to whatever hens may exist against it. The 
mere acceptance of abandonment by the underwriter, however, 
does not make it incumbent upon him to accept the ownership 
of the wreck or remnant of the property, as such acceptance 
might put him in possession of property of less than no value, 
that is, property so burdened with liens as to be a Uability rather 
than an asset. 

Validity of Abandonment. — The vaUdity of an abandonment 
depends upon the facts existing when it is made. If, on the 
basis of those facts, the tender of abandonment is accepted the 
relation of the assured and underwriter are definitely established. 
Subsequent improvement in the conditions surrounding the 
abandoned subject will not affect the validity of the abandon- 
ment, nevertheless by mutual agreement the abandonment may 



TOTAL LOSSES 331 

be withdrawn and the former relation existing between assured 
and underwriter reestablished. If the notice of abandonment as 
given to the underwriters sets forth facts which constitute a vaUd 
reason for the acceptance of the tender, but it is later proved that 
the facts were false and intended to deceive, the abandonment, 
of course, will not be effective as it will be tainted with fraud and 
be void. Abandonment once made by the assured and accepted 
by the underwriter is irrevocable without the consent of the 
underwriters. 

Tender Must be Promptly Made. — ^An assured must not un- 
duly delay tendering abandonment to underwriters. He must 
act with due dihgence, so that if he is within his legal rights in 
making the abandonment and does not attempt to make any 
efforts to save the property, the underwriter will have the right 
to take possession of the property and do what he can to minim- 
ize the loss. It will have been observed in connection with the 
Sue and Labor clause that while the assured is required to take 
measures for the preservation of the property, and the under- 
writer is permitted to intervene in order to safeguard the prop- 
erty, such acts on the part of either assured or underwriter are 
not to be considered as a waiver or an acceptance of abandonment. 
Underwriters may always refuse to accept abandonment. As 
soon as a case appears hopeless, it is the usual practice for the 
owner to tender and the underwriter to refuse abandonment. 
The rights of both parties having thus been preserved, the 
assured continues to seek means to recover the property imder 
the requirements of the Sue and Labor clause, until the absolute 
proof of the constructive total loss of the property can be 
demonstrated. 

Acceptance of Abandonment. — It is not necessary for an under- 
writer to indicate his acceptance or declination of a tender of 
abandonment. However, delay in dechning the tender, if un- 
duly prolonged, may be considered as an acceptance. A tender 
may also be withdrawn at any time prior to acceptance. If the 
tender is accepted by the underwriter, it must be by persons 
whose measiu'e of authority gives them the right to make such 
acceptance. It does not follow that because a payment is made 
on account after tender of abandonment that the tender has 
been accepted. An acceptance of the tender is an implied admis- 



332 MARINE INSURANCE 

sion of a right to make abandonment. It will also be observed 
that an abandonment made and accepted by a group of under- 
writers, as is frequently the case in hull insurance, does not make 
the underwriters Uable as joint owners, but merely as individual 
owners of shares in the salvage. If the underwriters upon the 
acceptance of abandonment do not wish to receive the salvage, 
they must give immediate notice to the assured of their disclaimer 
of such transfer. 

Effect of Acceptance. — The effect of the acceptance of abandon- 
ment by the underwriter and the transference to him of the wreck 
or salvage is to put the acts of persons, in whose care the property 
may be, at the risk of the underwriter. The assured himself 
becomes the trustee or agent of the underwriter or if there be 
several underwriters he becomes trustee or agent severally but 
not jointly. In the same manner the agent of the assured, for 
instance, the master of the vessel in the case of a hull abandon- 
ment, becomes the agent of the underwriters. The under- 
writers after acceptance, become to all intents and purposes the 
owners of the salvage, gaining all the benefits which such owner- 
ship carries with it, and incurring all the burdens, to the extent 
of their respective shares, which such ownership implies. 

Abandonment May be Deferred by Mutual Consent. — It is 
also proper for the assured and the underwriter after an accident 
has occurred, by mutual consent, to leave the question of abandon- 
ment in abeyance, the rights of neither to be affected by this 
arrangement. Whether or not the abandonment is finally made 
will depend upon the ultimate results of the disaster. The rule 
of abandonment is one which works to the advantage of the 
assured to the extent that it is optional with him whether or not 
he abandon. An underwriter cannot compel an assured to 
abandon. In a recent case, that of the Steamer Congress, 
where the vessel was so badly damaged by fire as to permit a 
vaUd claim for constructive total loss, owing to market condi- 
tions, the value of the hull in its biu-ned condition was worth 
more than the value of the vessel in the poUcies of insm-ance. 
Had the assured tendered abandonment and had the tender been 
accepted by the underwriters, they would have paid for a total 
loss, but under the abandonment would have obtained title to 
all the salvage remaining which in this particular case was worth 



TOTAL LOSSES 333 

more, as the event proved, than the insured value of the vessel. 
The assured being unwiUing under the circumstances to abandon, 
an arrangement was made with the underwriters by which a 
partial loss of ninety-five percent was paid and no abandonment 
made. The owners kept the remnant of their vessel, which they 
sold at a price exceeding the insured value of the whole. Repairs 
were made by the new owners and the vessel then was worth 
considerably more than twice the original insured value. 

Assignment Dates from Time of Loss. — It will be observed 
that in an abandonment case the assignment dates from the time 
of loss and the only property transferred by such assignment is 
the property that existed at the time of the loss, subject to its 
encumbrances. The property received by an underwriter upon 
the acceptance of abandonment is called salvage. This word is 
also used to describe the amount of money which is awarded to 
a voluntary salvor or to one who, under contract, undertakes 
salvage operations. These two meanings should not be confused. 

Abandonment of Vessel Involves Freight. — In connection with 
the subject of abandonment one pecuUar feature exists which 
presents a measiu-e of injustice that has been corrected by a clause 
inserted in most hull poUcies. An underwriter accepting the 
abandonment of a vessel becomes to all intents and purposes its 
owner and as such is entitled to any freight earnings which may 
accrue after the date of the accident, if the vessel is repaired and 
enabled to proceed to her destination. The result of this is, that 
the underwriter on the freight having an abandonment made to 
him at the same time and accepting abandonment has no salvage 
whatever, as the freight earned goes to the underwriter on the 
ship. This injustice has been corrected in most cases by inserting 
in poUcies on hull a clause reading: 

"In the event of total or constructive total loss, no claim to be made 
by the underwriters for freight, whether notice of abandonment has been 
given or not." 

No Abandonment if Loss Not Due to Insured Peril. — It will be 
evident that no abandonment can be tendered under a poUcy 
containing a "Free of Particular Average" clause if none of the 
casualties enumerated in such clause has occurred. For instance, 
a cargo might be insured under the usual "Free of Particular 

23 



334 MARINE INSURANCE 

Average (F.P.A.) " terms and the vessel might not be stranded, 
sunk, burned or in collision, yet through the springing of a bottom 
plank in heavy weather or other fortuitous causes, the cargo 
might be damaged ninety-five percent. Under the American 
pra<;tice requiring but a moiety of damage in order to permit 
abandonment, no abandonment could be made in this case be- 
cause the loss was occasioned by a peril not excepted in the free 
of average clause. Mere delay in the forwarding of goods to their 
destination caused by a peril insured against will not give the 
right to abandon. 

Total and Constructive Total Loss of Vessel. — To have a valid 
claim for total loss on vessel, the vessel must be destroyed or 
lost or reduced to a condition of irreparability. What iirepara- 
bility is in any case is a question of fact and may be judged most 
accurately by the action which a prudent uninsured owner would 
take under the state of facts presented. The usual question is: 
"Will the cost of salvage and repairs exceed the repaired value?" 
As has already been indicated, it is an exceedingly hard matter 
to determine what is the real value of a vessel. In order to 
avoid this question many hull policies provide that the insured 
value shall be taken as the repaired value. In determining 
whether or not there is a constructive total loss of vessel, there 
should be brought into consideration any temporary repairs 
and the permanent repairs which may be necessary to restore 
the vessel to its former condition. To this sum is added the 
necessary amount of salvage which must be paid in order to 
bring the vessel to the port of repair. If the casualty has re- 
sulted in general average sacrifices or expenditures for which con- 
tribution will be received by the owners, deduction should be 
made of such expected recovery. 

Total Loss of Cargo. — In the case of cargo, a total loss will 
occur when the property is totally lost or destroyed as in a case 
where a vessel is sunk to a point precluding recovery of the cargo 
or where the cargo is completely destroyed by fire. It wUl often 
happen in case of fire that a cargo will not be touched by fire, 
but its value completely destroyed by the smoke or by water 
or steam used to extinguish the fire. Goods may also be rendered 
worthless not because of their destruction by perils insured 
against, but because the action of the peril has completely 



TOTAL JjOSSES 335 

changed the nature or specie of the insured subject. It may also 
be that a constructive total loss of cargo will result when the 
goods, while not excessively damaged, will cost so much to carry 
forward to destination that their value at destination will not 
equal the expenses necessary to place them there. This is quite 
frequently the case with bulky articles of small value, where 
the cost of handling and reconditioning is out of all proportion 
to the intrinsic value of the commodity. 

Total Loss of Freight. — ^A total loss of freight occurs when a 
ship and its cargo become a total loss or when there is an in- 
definite detention of the ship or when other circumstances exist 
which make it impracticable to forward the cargo and so earn the 
freight. In the case of a round trip charter if there be a total loss 
of the ship and cargo on the homeward passage, and the freight 
is a lump sum for both outward and homeward passages, there 
will be a total loss of the entire freight. The same rule will apply 
with respect to a constructive total loss of freight. If a vessel 
in ballast proceeding under charter to a loading port is lost, there 
will be a total loss of the entire freight on the proposed voyage. 
If goods under a collectible freight bill of lading arrive at port of 
destination in specie but in a worthless condition through perils 
insured against, there will be a total loss of freight which will be at 
the risk of the cargo and not the vessel owner, and will be adjusted 
in connection with the settlement of loss on the cargo. A con- 
structive total loss of cargo through war perils results in a con- 
structive total loss of freight, if the insurance on freight is against 
war risks. 

Proximate Cause. — It will be observed that the peril causing 
loss does not determine whether a loss is general average, par- 
ticular average or total loss. The cause of loss is ascertained 
in order to determine whether or not the loss incurred results in a 
liability under the policy which is being considered. In deter- 
mining this question, however, it is the proximate and not the 
remote cause of the loss that is the deciding factor in establishing 
liability. This subject has been considered in a previous chapter, 
but the question of proximate cause becomes vital in the con- 
sideration of claims, since frequently, doubt will exist as to which 
of two perils, only one of which is insured against, operating 
simultaneously or in succession, was the proximate and an 



336 MARINE INSURANCE 

efficient cause of the loss. The general insurance of war perils, 
and the fact that war and marine perils on the same property 
are insured with different underwriters give rise to many ques- 
tions in regard to proximate cause. A captured vessel, or a 
vessel deviating under express governmental instructions, may be 
overtaken by marine peril while in a perfectly safe and proper posi- 
tion. Although no doubt will exist that the immediate cause of 
loss is a marine peril, imderwriters will be loath to admit UabiUty, 
claiming the proximate cause of loss is the capture or the deviation 
under instructions, thus exposing the vessel to a peril which would 
not have been encountered had the vessel been free to proceed on 
her voyage. Each particular case must be decided on its merits, 
no hard and fast rules existing for the determination of these 
questions. The matter is one of fact and from the facts obtain- 
able in each case the proximate cause of loss must be determined. 
War Losses. Missing Vessels. — ^War losses fall into the same 
general classes as marine losses, but experience has proved that 
owing to the nature of the peril, the majority of such losses are 
total. The question of missing vessels was an important one 
during the recent war. Here again, the real point at issue was 
the proximate cause, but in these cases the question had to be 
decided by circumstantial evidence alone, and therein lay the 
difficulty. Prior to the outbreak of the World War it was a well- 
established, and rarely disputed, principle of marine insurance 
law that a missing vessel was presimied to have been lost by a 
marine peril. This was a reasonable theory in that naval opera- 
tions were rather restricted and unless the circumstances were 
unusual, definite particulars of the destruction of a merchant 
vessel by war peril would in due course be announced. After 
belligerent governments began using mines, there was always the 
possibiUty that a missing vessel had been destroyed by a drift- 
ing mine. The progress of the late war saw the introduction of 
entirely new methods of naval warfare, in the sowing of mines at 
sea, in the unrestricted and illegal submarine activities and in 
the illegal sinking of merchant vessels by raiders. It therefore 
came to pass that vessels on comparatively short trips, say of 
three or four days' duration, and in coastal waters would sail but 
never again be spoken. To assume and to decide that such losses 
were the result of marine perils would be to take an unjust atti- 



TOTAL LOSSES 337 

tude with respect to marine underwriters, especially if it could be 
established that the vessel was perfectly seaworthy when it sailed 
and during the ordinary time in which the passage could be 
accomplished, there was no record of storm to which the loss of 
the vessel might be attributed. Accordingly cases are on record 
in which, under such a state of facts, the loss was held by the 
court to be due to war perils. Or course, as distances increase 
and as the usual length of voyage becomes greater, it is increas- 
ingly difficult to furnish satisfactory circumstantial evidence 
tending to establish the cause of loss of a missing vessel. How- 
ever, while there are many cases of missing vessels still pend- 
ing, sufficient judgments have been rendered to indicate that the 
former rule of marine loss in such cases is no longer presumed, but 
that the whole question is open for decision on its merits. 

Presumption of Cause of Loss. — In the ordinary case where 
there are no war perils involved, where the vessel sailed in a 
seaworthy condition and no evidence is forthcoming to indicate 
that the vessel could have been lost by any peril other than those 
insured in the poUcy, it has always been assumed, after the lapse 
of a reasonable length of tune without tidings from the vessel, 
that it has been lost through an insured peril. The length of 
time which must elapse before a vessel is presumed to be a total 
loss depends upon the circumstances of the particular case, with 
respect to the length of the voyage, the character of the voyage, 
the season of the year and other considerations of a similar nature. 
Under Enghsh practice when a vessel has been missing for such a 
length of time that it can safely be presumed to be a total loss, 
the vessel is posted at Lloyd's as missing. Ten days after such 
posting the loss becomes due and claim can be made on the 
underwriters. In this country the loss is usually due thirty days 
after the presumption arises that the vessel is lost. Formerly 
there seems to have been a custom that such presiunption 
arose after the lapse of a year and a day, but this custom is now 
obsolete. During the war when conditions were such that pru- 
dence required that there be no haste in determining the status of a 
vessel presumed to be lost, the war and marine imderwriters on the 
risk were usually disposed each to settle for fifty percent of the loss 
without prejudice, permitting the question of liability to remain 
open until such time as evidence was forthcoming to prove the 



338 MARINE INSURANCE 

cause of loss. It frequently happened during the World War, that 
months after a vessel had been reported missing, a beUigerent 
raider would return to its base and report the sinking of the vessel. 

Perplexing Problems. — It is not alone in regard to missing 
vessels that the war has created doubt as to the proximate 
cause of loss, but cases have arisen where all the circumstances 
were known and yet the question was one requiring judicial deter- 
mination. Thus in the case of a vessel sailing without lights or 
sailing over an unlighted coiu-se under governmental instructions, 
with resultant stranding or coUision, the question was raised as to 
whether the proximate cause of the loss was one arising out of the 
conduct of the war or whether it was due to an actual peril of the 
sea. New problems also arose in connection with losses caused 
by submarines. For instance, a submarine while submerged 
might be run into by a merchant vessel and a question would arise 
whether this was a marine or a war loss. Then, too, cases oc- 
curred where a submarine in attempting to emerge lifted directly 
under a merchant vessel doing great damage. Such casualties 
occurred not only at sea but in harbors where the emerging 
submarine was not a beUigerent vessel but one belonging to the 
same nation as the port. In other cases, vessels were torpedoed, 
though not injured to such an extent that they were sunk, but in 
making port, or in efforts to drive them ashore, they encountered 
marine perils which resulted in their ultimate destruction. Other 
novel losses, which resulted only because a state of war existed 
and yet in their nature seemed to be due to marine perils also 
brought up the question of proximate cause. 

Doubtful Cases. — In addition to these cases there have been 
others, where doubt has arisen not only regarding the proximate 
cause of loss, but also whether or not the inciting cause of the loss 
was one against which either the marine or the war poUcy 
would furnish protection. Consideration has already been 
given to these cases and to the methods of furnishing protection 
against such perils. War adds many new problems to marine 
underwriting, some of which only show themselves to be problems 
after some unexpected and unforeseen type of loss has overtaken 
the venture. War losses are adjusted on the same basis as marine 
losses, the principles of general average, paticular average and 
total loss applying with equal force to this character of loss. 



TOTAL LOSSES 339 

The Right of Subrogation. — No consideration of the subject of 
marine losses would be complete without making some reference 
to the right of subrogation. While the underwriter may be 
liable under the policy of insurance for the loss incurred it does 
not necessarily follow that he alone is responsible for the injury 
suffered. In many cases there arises, because of the accident 
causing the loss, a liabiUty on the part of some third party to 
respond for the injury suffered by the assured through the damage 
or destruction of his property. Thus in a colUsion case, it often 
happens that one of the colliding vessels alone is at fault, and 
consequently is liable for the damage caused except in so far as 
such liability may be Umited by law. This Uability on the part 
of the colUding vessel does not, however, exonerate the under- 
writers of the innocent vessel from their obligation to the owner 
under their poUcies of insurance. It would be manifestly unfair, 
however, for the underwriters to respond for the loss, and for the 
owner to retain his right of action against the owners of the 
offending vessel. Accordingly in order that the equities may be 
preserved, upon the payment of loss by the underwriters, they 
are by law vested with the benefits accruing from the right of 
action, which has arisen in favor of the assured. This is known as 
the right of subrogation. Through this right the underwriter is 
clothed with all the benefits arising from claims against third 
parties, which have arisen since the date of the casualty, and the 
assured is obligated to lend his name and good offices in the 
collection of such claims. The expense of collection, legal 
and otherwise will, of course, be assumed by the underwriters in 
proportion to the interest which they have in the claim. If the 
settlement \mder a policy covering the entire interest has been 
for a total loss the underwriter is entitled to the benefit of the 
right of action in full, if on the other hand the loss is but partial 
or the property is not fully insured, the underwriter will be sub- 
rogated only to the extent that the assured has been indemnified. 
The right of subrogation arises at the moment of payment. 

Salvage. — This right of subrogation must be distinguished from 
the interest in the subject matter itself known as salvage, which 
the underwriter obtains under an abandonment or by assignment. 
In the case of a particular average the assured naturally retains 
physical possession of the property, nevertheless the underwriter 



340 MARINE INSURANCE 

by, virtue of the payment of partial loss, is subrogated to the 
rights of the assiu'ed against third parties, because of the loss. 
In the case of a total or constructive total loss, the underwriter 
obtains a full interest in the salvage, assuming that the property 
has been fully insured, and in addition by this right of subroga- 
tion is vested with a full interest in all claims arising out of the 
casualty. 

Carrier's Liability. — In considering the skeleton form of cargo 
policy, it was stated that most underwriters incorporated a clause 
under which the assured warrants that the underwriters shall be 
free of any liabiUty for loss or damage to goods in possession 
of a land or water carrier or in possession of any other bailee 
who may be Uable for such loss or damage by law, or imder an 
insured bill of lading or imder a rate of freight that includes 
insurance or otherwise. It further stipulates that the policy 
shall be void with respect to goods shipped under a bill of lading 
containing a provision that the carrier is to have the benefit of 
any insurance that may be placed on the goods. 

Carriers Slow to Respond for Losses. — ^As already indicated, 
a common carrier by land is held to a high degree of accoimta- 
bility, while a conmion carrier by water, while relieved of much of 
his legal liability under statute, is nevertheless still charged with 
considerable responsibility in connection with the safe-guarding 
and protecting of property in his custody. It is a well-recognized 
fact that collections from conunon carriers are slow and in many 
cases uncertain, the carriers taking advantage of every possible 
technicality in order to avoid payment of losses due to their 
negligence. On the other hand, in order that modem business 
may continue uninterruptedly, it is necessary that merchants 
be promptly reimbursed in the event of loss or damage overtaking 
their property. Thus it has become the custom for imderwriters 
to reimburse merchants for losses to their property caused by 
perils insured against, but which are due to the neghgence of the 
carriers, the merchants at the same time filing claim and en- 
deavoring to recover from the carrier. In the event of recovery, 
the merchants reimburse the imderwriters for the payment made. 

Benefit of Insurance Clauses. — In cases where this condition 
exists, the carriers, knowing that the merchant had been reim- 
bursed for his loss, have refused to settle claims, taking the posi- 



TOTAL LOSSES 341 

tion that the merchant being reimbursed by his underwriter, had 
really suffered no injury. In order to further strengthen this 
position, clauses were inserted in bills of lading by which the 
carrier claimed the full benefit of any insurance that might be 
eflFected upon or on account of said goods. The validity of these 
clauses was doubtful, but in order that the underwriters might not 
be embarrassed by the presence of such clauses in bills of lading 
they inserted in their policies, another clause making the poUcy 
void with respect to merchandise shipped under bills of lading 
containing the stipulation that the carrier should have the benefit 
of any insurance on the goods. This had the effect of annuUing 
the advantage which the carrier hoped to get by his benefit of 
insurance clause. The courts have upheld the validity of this 
clause in insurance policies. 

Loan Receipts. — However, this clause in an insurance poUcy 
left the merchant without protection, so a further stipulation 
was made in the poUcy by which the underwriter agreed, with the 
assured, that in the event of loss or damage covered by the poUcy, 
for which the carriers might be Uable, the underwriter, in order 
to place the merchant in funds, would advance to him as a loan, 
an amount approximating the loss suffered. This loan would 
be repaid if recovery were obtained from the carriers except in so 
far as such recovery was insufficient under the terms of the policy 
to reimburse the merchant for his loss. A regular form of loan 
receipt was prepared in such cases, which was signed by the as- 
sured. The carriers then endeavored to take the position that 
the loan receipt was but a subterfuge, and that owing to the fact 
that the merchant was really reimbursed by the underwriter 
for the loss which had occurred, the merchant was not injured 
by the non-payment of the loss on the part of the carrier. This 
question has been a disputed one for sometime but in a decision 
recently handed down by the Supreme Court of the United States, 
the vaUdity of the loan receipt has been finally established and 
the carrier is held to a strict accountability under the liability 
imposed upon him by law. 



CHAPTER 21 
BROKERS. MUTUAL COMPANIES 

The Business of Insurance. — There remains for consideration 
what may be termed for want of a better name, the mechanical 
side of marine imderwriting, that is, the physical processes in 
connection with the miderwriting of risks. This subject natu- 
rally divides itseK into three parts, first, the method of contact 
between the assiu^ed and the underwriter, second, the conduct 
of the underwriter's own organization, that is, the incorporated 
insurance company, and third, the accoimtabiUty of the under- 
writer to the pubUc, for, having received, by the grace of the 
pubUc, the right to conduct the business of insurance, the public 
demands that the stewardship of this privilege be revealed to it 
through the annual statement of the affairs of the company to 
the various state insiu*ance departments. These three phases 
will be considered in this and the following chapter. 

Brokers. — The contact of the pubUc with the imderwriter 
is established in one of two ways, first, directly either by personal 
interview or through the mail, and second, through an inter- 
mediary, a technically trained expert, speciaUzing in the business 
of marine insurance and known as the insurance broker. The 
special agent, so common in other branches of insurance, is practi- 
cally unknown in marine insiu*ance. While the direct method of 
contact with assured and underwriter continues to a considerable 
extent, especially in connection with mutual insurance, it is not 
surprising that, in a time when efficiency is one of the gods at 
whose feet business men worship, the broker should gain a place 
of ever increasing importance in the marine insurance field. He 
may be called the middle man of the marine insurance market, 
knowing accurately market conditions, and acting as the dis- 
tributing medium between the underwriter and the merchant. 

Not a New Factor. — The broker is in no sense a new factor in 
the marine insurance market. As early as the fifteenth century 
reference is found both in England and Continental countries 

342 



BROKERS, MUTUAL COMPANIES 343 

to the activities of insurance brokers. Individual underwriting 
probably created the condition which made useful the work 
of the broker. It will be recalled that in England, at least, for 
some time private underwriters conducted their business in their 
own homes. It was a great aid to the merchant, to be able to 
engage the services of one who knew where the underwriters 
lived and who would take the poKcy from house to house obtain- 
ing the signatures of various underwriters \mtil the whole amount 
was taken and the poUcy of insurance completed. With the 
gathering of the individual imderwriters under one roof, the same 
need of an intermediary between assm'ed and imderwriter con- 
tinued, and the broker passed from desk to desk obtaining signa- 
tures. Even today, at Lloyd's, the room is not open to the 
pubhc, but authorized brokers, some of whom are themselves 
underwriting members of Lloyd's, perform this important and 
necessary work in the placing of marine risks. 

Brokers Indispensable. — In this country, the broker appeared 
early in the insm ance market and has grown with the develop- 
ment of the business and now performs an indispensable service 
in the placing of marine risks. His work has in principle changed 
little, for as it was necessary four hundred years ago to visit fifty 
individual underwriters to place a risk of £10,000, so today it is 
sometimes necessary to obtain the aid of fifty incorporated in- 
surance companies in order to place a risk of $1,000,000. The 
values coming into the market are proportionately larger, but 
the law of supply and demand works inexorably and the market 
rarely becomes larger than is needed for the ordinary line, so 
that brokers still, as in the older days, wear beaten tracks between 
the offices of the underwriters. 

Occupies an Anomalous Position. — The broker occupies a 
somewhat anomalous position in the field of agents. Ordinarily 
an agent is paid by his principal. With the insurance broker, 
however, this condition is reversed. He is engaged by and acts 
as the agent of the assured, but is compensated by the imder- 
writer. It is, of course, true that the merchant indirectly pays 
for the service rendered in the increased cost of insurance, never- 
theless, it is an indirect charge, which does not make the same 
mental impression as an item of brokers' commission would 
if added to the bill for insurance premium. If the charge were 



344 MARINE INSURANCE 

so made it would doubtless result in more direct transactions 
between assured and underwriter, but whether this would work 
to the advantage of either assured or insurer is altogether problem- 
atical. The average assured needs the services of a highly 
trained expert in whom he has a confidence that he might not 
have in an underwriter who would be one of the parties to the 
contract. A disinterested intermediary tends, at least, to calm 
the mind of the assured who, as a rule in this country, is quite 
ignorant of the principles of this exceedingly important part of 
his commercial transactions. An expert broker not only is of 
value to the assured, but he performs a distinct service to the 
underwriter in relieving the latter of the necessity of explaining 
to inexperienced assured their poUcy obligations and in preparing 
for the underwriter proper declarations of insurance from the 
inadequate reports too often submitted by the assured. 

The Broker Offers Service. — The broker, then, offers himself 
for employment as a specialist, as an expert in the principles and 
practice of marine insurance. A broker has but one thing to 
offer to the assured and that is service. Service in its broadest 
meaning is the sole defendable reason for the existence of the 
able group of brokers found in the marine market. The com- 
parative success or failure of individual brokers or of firms of 
brokers rests in large part on the interpretation they give to this 
word service. It is not enough that the broker place the risk 
which his client sends him. He must place it with the under- 
writers having the greatest security and the best reputation for 
fair dealing with the assured. This, however, represents in its 
barest outline the duty of the broker. 

A Trained Expert. — In soliciting business, the broker presents 
himself to a prospective cUent as a trained expert in the business 
of marine insurance. He offers to obtain the kind of insurance 
which this merchant or shipowner needs at a less cost than he is 
now paying, or to provide better insurance at the same cost 
or at a cost slightly greater than the prospective cUent is now 
paying, which latter will actually result in a reduction of cost on 
account of the lessened risk remaining at the charge of the 
assured. He further offers to take better care of the client's 
interests, to relieve him of all responsibiUty in regard tp the 
insurance except the duty of promptly reporting the facts nee- 



BROKERS, MUTUAL COMPANIES 345 

essary to enable the broker to place the insurance. He further 
offers, in the event of loss, to conduct the negotiations relating 
to the adjustment and payment of said loss without trouble 
to the assured. The performance of these duties and others 
unnamed, but which are inseparably bound up in the complete 
execution of those which are named, is furnishing service. Suc- 
cess, and with it prosperity, will come to those brokers who 
make good their promise by performance in a manner better 
and more expert than their fellows. 

The Broker Knows the Market. — ^The broker, as a trained 
expert, requires a degree of knowledge approximating in a meas- 
ure that which the expert underwriter or loss adjuster has. The 
broker obtains from his cUent a bare statement of facts concern- 
ing his commercial operations, the kind of goods in which he 
trades, the routes of shipment and other necessary items to enable 
him to gain a clear insight into the kind of risks upon which he 
must obtain insurance. Having this information in hand, he 
applies his knowledge of marine insurance to these facts, decid- 
ing what form of protection is best suited to the particular case. 
He carefully weighs the comparative gain in the use of clauses 
granting a high degree of protection with respect to average, for 
instance, against the increased cost of such protection. Having 
reached a conclusion he may first submit and explain to his 
client the form of insurance which he would advise and obtain 
the consent of the cUent to accept such a pohcy. Of course, if 
there should be any doubt in the mind of the broker as to the 
possibility of obtaining the kind of protection which he thinks 
the client needs, he will first test the market to learn if there are 
underwriters who will accept the proposed poUcy and at what 
rates. The suggestion that he obtain a certain form of insurance 
may appeal strongly to a new or prospective client, but if the 
proposal cannot be underwritten little credit will result to the 
broker. A broker must have a working knowledge of what the 
market offers and at what cost. 

Progressive Underwriting. — ^However, it must not be pre- 
sumed that the broker should limit his efforts to obtaining condi- 
tions or rates which he knows are readily granted. If he honestly 
believes that his client needs a form of protection not heretofore 
offered by underwriters, or if his client demands a certain form 



346 MARINE INSURANCE 

of protection which he believes can be consistently underwritten, 
it is his duty as an intermediary to use his eflForts to obtain such 
form of policy. Much of the progress which has been made in 
the broadening of the marine insurance contract is due to the 
honest efforts of experienced brokers to obtain better protection 
for their cUents. At this point, however, the broker is treading 
on dangerous ground. In his desire to gain business he may 
advocate the granting of conditions, which on sober second 
thought he may realize are fraught with peril to the careless 
underwriter. Nevertheless his desire for business may warp 
his judgment, and he will seek to obtain these unwise insurance 
conditions and perhaps succeed. If the underwriter is induced 
to grant weak conditions and consequently suffers heavy losses 
he will be apt to consider with undue caution future proposals 
from this source. To be sure, competition often compels a 
broker to ask an underwriter to grant conditions which he 
beUeves to be unwise, but if in such cases the broker will take 
the trouble to explain that competition is causing him to plead 
against his better judgment, the underwriter will be more dis- 
posed to treat with him and cannot later feel that the broker has 
taken an unfair advantage. 

The Broker's Duty Twofold. — It may be thought that an 
underwriter should be competent to take care of himself and that 
if he does poor underwriting in the granting of unwise conditions 
and inadequate rates he alone is responsible. This is not alto- 
gether the case. It frequently happens that a broker controlling 
a large volume of business, will obtain a powerful position in 
the underwriting market and underwriters will seek his favor, 
in order to obtain a share of the business which he controls. 
When such a condition exists a broker, in order to obtain from a 
prospective client an account controlled by another broker, may 
offer to furnish a policy containing conditions which appeal to 
the client, but which the broker knows are not in harmony with 
soimd underwriting. Having obtained the account imder such 
promise, he will use his power indirectly it may be, but neverthe- 
less effectively, to induce one or more imderwriters to grant the 
required conditions. The broker owes a duty not only to his 
client but also to the underwriter to foster and conserve in every 
practicable way the stabiUty of the latter in order that the 



BROKERS, MUTUAL COMPANIES 347 

security behind the policy may continue to be of the best. Brok- 
ers should reaUze that the success of the insurance companies 
alone makes possible the continued existence of their own 
business. In this country, the broker has no capital at risk which 
will be afiFected by the success or failure of the underwriter. 
Nevertheless, it is just as much his duty to refrain from asking 
unwise insurance conditions of underwriters as it is to see that his 
cUent obtains the fullest measure of protection consistent with 
safe underwriting. The broker should realize that in the last 
analysis, his interest and that of the underwriter are one. 

The Broker's Attitude Toward Losses. — It is not alone in the 
placing of risks that the broker has this twofold duty. The same 
obUgation exists with respect to the collection of losses. Not- 
withstanding the efforts which the broker may make to explain 
to the assured the measure of protection which he is receiving 
under the policy of insurance in regard to perils covered and to 
average conditions granted, some assureds feel that in the event 
of loss the imderwriter should recompense them no matter what 
the nature or extent of the damage suffered. Accordingly they 
will present a claim to the broker. In cases where the facts 
presented indicate clearly that no UabiUty exists on the part of 
the underwriter, the claim should never reach him. The 
broker should return it to the assured and explain to him why 
no liability rests upon the underwriter. If, on the other hand, 
there is a reasonable doubt as to the question of Uability, or if 
the facts as presented are unusual and give rise to the question as 
to whether as a matter of equity rather than as a matter of legal 
right, the assured may be entitled to a hearing with respect to the 
claim, then the broker should present the case to the imderwriter, 
pleading the cause of his client, but leaving the question of 
settlement to the judgment of the imderwriter. The broker's 
position is not always an easy one and in many cases no little 
degree of tact is required in order to amicably satisfy both 
assured and assurer. His position is often that of a buffer 
taking up the blows deUvered by both assured and uinderwriter. 

The Broker Arranges Settlement of Losses. — The duty of a 
broker does not end, however, with the presentation of claim for 
loss. Sometimes he actually makes an adjustment of the loss, 
merely presenting the completed claim for the approval of and 



348 MARINE INSURANCE 

settlement by the underwriters. Some underwriters prefer to 
make their own adjustments and in such cases the broker collects 
the necessary documents in order to prove the claim, presenting 
these to the underwriter for his consideration. The imderwriter 
then makes up the adjustment which is presented to the broker 
for the approval of his client before payment is made. It is the 
duty of the broker to carefully scrutinize this statement of loss, 
and to make certain that his client is receiving the full measure 
of recovery afforded by the policy. Having approved the adjust- 
ment and, if necessary, obtained the assent of the assured to it, 
and having arranged for the execution of whatever documents of 
assignment may be required by the underwriter, he collects the 
loss and makes remittance to his cKent. 

The Broker's Services in General Average. — If the casualty 
in which the property is involved results in a general average 
sacrifice, the broker makes the necessary arrangements for the 
release of the goods, advises with respect to the general average 
bond, and obtains the general average guarantee from the under- 
writers. The amount of time and trouble expended in the 
collection of losses is sometimes very great, especially when intri- 
cate questions of Uability arise. Some brokers charge a commis- 
sion for the collection of losses, while others perform this labor 
gratis, considering that this is part of the service they have agreed 
to give their client. In any event, unlike the placing commission 
which is paid by the underwriter, the collecting commission is 
paid by the assured, either as a separate item, or if the loss is 
directly paid imder order of the assured to the broker, by a deduc- 
tion in the remittance of the payment of loss to the assured. 

Commissions. — The question of commission should be the last 
thought of the broker. It is true that this is the soiu-ce of his 
income, yet the main consideration for the broker is to give the 
best quaUty of service to his cKents and to so conduct his opera- 
tions with the imderwriters that both cUent and underwriter 
will wish to do business with him again. If the broker can suc- 
cessfiilly meet this twofold obUgation, the matter of commission 
will take care of itself and his financial success will be assured. 
To the conscientious and skillful broker the business is very lucra- 
tive. In the brokerage field a good reputation spreads quite as 
quickly as does a bad one, and clients will come to the broker 



BROKERS. MUTUAL COMPANIES 349 

who consistently furnishes the best service and who because 
of his relations with the underwriters can furnish poUcies backed 
by the best security which the market affords. 

Broker Does Not Guarantee Payment of Premiums. — In this 
coimtry the broker in the ordinary case does not guarantee the 
solvency of his client^ that is, he is not a guarantor for the collec- 
tion of the premiums. It is his duty, however, to use all reason- 
able efforts to make collection of the premium, but if his client 
becomes financially embarrassed and fails to pay, this does not 
create any financial obligation on the part of the broker to the 
underwriter. It sometimes is the case, however, that an under- 
writer may be unwilling to write an account because of lack of 
faith in the financial standing of the assured, in which event the 
broker may guarantee the payment of the premiums. Such 
agreement should not be left to inference, but should be expressly 
agreed to in writing by the broker. While there is no financial 
obligation on the part of the broker in the ordinary case with 
respect to the payment of premium, there is a moral obligation 
on his part not to offer business to an underwriter unless he is 
reasonably certain of the financial integrity of his cUent. Fur- 
thermore the broker's own reputation with the underwriter is in 
a large measure determined by the character of business offered. 
If he constantly offers businss where the moral hazard is bad, or 
business which proves improfitable because of careless packing or 
handling of goods or of lack of skill in the operation of vessels 
he will soon find that the first-class market is closed to him and 
that aU risks offered by him are looked upon with suspicion. 
A broker's reputation will depend in no small measure on the 
reputation of his clients. 

The Broker as an Underwriter. — Within recent years a new 
situation has developed in the marine underwriting field, where 
brokers have entered on the dual career of broker and imder- 
writer. That is, large brokerage firms or corporations, which 
formerly confined their operations solely to the placing of risks 
and the adjusting of losses, have opened separate departments for 
the underwriting of risks, receiving appointment as general or 
special agents of important marine insurance companies. In 
some cases, the underwriting is conducted under the same name 
as the brokerage portion of the business, in others, a separate 

24 



350 MARINE INSURANCE 

firm or corporation is organized for the conduct of the under- 
writing section of the business. While there is an apparent 
separation of interest there is nevertheless a unity of control. 
If there is a complete separation between the two branches of 
the business there would seem to be no sufficient reason why a 
broker should not extend his activities to the underwriting 
field. The principal difficulty in the situation is one which can- 
not be removed; that is, Jiuman nature. It is a difficult matter 
for two phases of a business which, m a measure are opposed to 
each other in their method of approaching the problems of that 
business, to be conducted by a single person or by the same 
group of persons without the two methods of approach becoming 
involved. 

A Difficult Relation. — The two chief dangers in this compUcated 
system are first, that the aid of the imderwriting branch of the 
business will be given to the brokerage branch in order to create 
a lead. That is, the underwriting branch may grant conditions 
and rates which are necessary for the obtaining of a new account, 
and if the companies represented are of sufficient reputation, 
other underwriters may follow the lead. In the second place, a 
broker acting as an underwriter obtains valuable mformation 
regarding the business connections of other brokers. The 
underwriter occupies a confidential relation both to broker and 
to assured, and if a broker acting as underwriter abuses this con- 
fidential relation the result will be that other brokers will not 
avail of the underwriting facilities, except in case of urgent ne- 
cessity, and there will be a consequent loss of business to the 
insiurance company which has entrusted its underwriting agency 
to a broker. From the company standpoint, however, this may 
possibly be offset by a consideration of the fact that a large 
brokerage concern controlling a great amount of business may 
bring to the company a volume of premium income which it 
might not otherwise obtain. While the entrance of the broker 
into the underwriting field has, up to the present time, revealed 
no considerable abuse of the dual relation, it is a condition that 
is fraught with dangerous possibilities and one which in the 
hands of unscrupulous persons, might lead to serious conse- 
quences. On principle, a complete separation of broker and 
underwriter will do most to foster the growth of the marine 



BROKERS. MUTUAL COMPANIES 351 

market and will leave competition free and open with resultant 
benefit to the insm'ing public. 

Brokers in England. — Because of the intimate connection 
between the English and American marine insurance markets, 
it is interesting to note the different method of conducting 
brokerage operations in England. There the broker occupies a 
position which, to a certain extent, is fiduciary in its nature. 
It has already been pointed out that the ordinary form of the 
English policy by its terms confesses payment of premium. 
The Marine Insurance Act of Great Britain provides thiat where 
a marine poUcy eflFected by a broker on behalf of the assured 
acknowledges receipt of the premium, that such acknowledg- 
ment is, in the absence of fraud, conclusive as between the in- 
surer and the assured, but not as between the insurer and the 
broker. This seems to free the assured from any liability for 
premium under such a policy. Another section of the same Act 
provides that when a poUcy is placed by a broker, the broker 
is responsible to the underwriter for the premium, but he has a 
hen on the poUcy for the premium plus his charges for eCFecting 
the msurance. The system in use in Great Britain is for the 
broker to make monthly remittances to the underwriters for 
premiums due, the broker receiving the policies and retaining 
them until payment is made by the assiu*ed. The assured is also 
expected to make monthly remittances to the broker, ten per- 
cent discount being allowed by the underwriter to the broker 
and by him in turn to the assured if payments are made by the 
tenth of the month. In addition to this, the underwriter allows 
five percent to the broker as a placing commission. 

Losses and Return Premiums. — ^While the pajnnent of pre- 
mium is in England a matter that rests between the underwriter 
and the broker, the underwriter is directly responsible to the 
assured for the pajnnent of losses and for the payment of retiu-n 
premiums. The broker is thus placed in the peculiar position of 
being Hable for the premium, but in the event of non-payment 
by the assiu-ed he is not able to lay claim to a possible loss out 
of which he might reimbm'se himself for the premium paid. 
However, if the broker retains possession of the policies as is his 
right under the law, until the premium is paid, he will be in 
the position of preventing the assured from collecting a loss or 



352 MARINE INSURANCE 

a return premium owing to the non-ability of the latter to produce 
the policy. The broker's position is, therefore, not quite as 
precarious as the bare statement of the rule would seem to 
indicate. Furthermore the hen which the broker retams by the 
possession of the pohcy does not apply to the particular policy 
alone, but to any other unpaid balance arising out of an in- 
surance accoimt between the broker and his client. 

Current Accounts. — ^As a matter of practice, however, the 
broker usually attends to the collection of return premiums 
and losses and runs a credit and debit account with hiscUent, charg- 
ing the account with premiums due and crediting it with return 
premiums and losses recovered, the debit or credit balance being 
settled from time to time by the assured or the broker as the 
balance may make necessary. This bare outline of brokerage 
practice in England will serve to indicate the more responsible 
position of the broker in the English marine insurance market 
as compared with his American contemporary. 

Mutual Companies. — In connection with the placing of in- 
surance directly with the underwriter by the assured, the mutual 
company offers perhaps the best illustration, though this direct 
method is by no means confined to mutual companies. The 
mutual idea, however, was originally adopted in order that mer- 
chants and shipowners might reduce the cost of insurance by 
reducing the overhead charges involved in the placing of risks. 
The mutual idea was not new when the first mutual companies 
were organized in this country. The original theory of insurance 
in England was mutual in its conception, merchants and ship- 
owners meeting in the coflfee houses and each accepting a share 
in the ventures of their fellows. The novel featiure in the develop- 
ment of the mutual theory in this country was the plan of con- 
ducting mutual underwriting through a corporation. In the 
second quarter of the nineteenth century the idea took deep 
root in the United States and many mutual insurance companies 
were chartered. As is often the case with ideas looking to the 
reduction of the cost of commodities or of service, the theory 
is advanced by men who are visionaries rather than experienced 
business men with the inevitable result that the theory in its 
application is stripped of sound business principles. This ex- 
plains in part the meteoric rise of the mutual idea in the country 



BROKERS, MUTUAL COMPANIES 353 

and its equally rapid decline. Men who were successful in their own 
lines of merchandising or of ship operating were not necessarily 
fitted to be successful underwriters and many of these companies 
conducted by insurance amateurs inevitably went into liquidation. 

Theory Soiind in Principle. — That the theory is, however, 
sound in principle and when applied on conservative business lines 
leads to a safe and desirable method of providing insurance 
protection, is clearly evidenced by the successful operation of a 
number of these companies through a long period of years. It 
is true that all but one of the mutual marine companies has now 
been liquidated, but this is owing to the change of business 
methods in the country, rather than to any fault in the system. 
The continued success and prosperity of the remaining company, 
standing as it does in the very forefront of the American marine 
market, is the best evidence of the fact that even in a changed 
business world, the theory of conducting insurance for the benefit 
of the policy holder rather than for the profit of stockholders 
makes a strong appeal. Furthermore, a company responsible to 
its poUcy holders alone, occupies a position of independence 
in the marine market, which has a salutary effect in preventing 
rate increases made, not because of the increased cost of insur- 
ance, but rather to bring added profit to invested capital. 

Method of Organization. — The mutual system then being an 
important element in the American marine market, a brief out- 
line of its method of organization will be of interest. The original 
capital with which the mutual companies began business was 
furnished by the merchants and shipowners who organized them. 
These men did not advance cash but gave notes to the companies 
which were negotiated and furnished the working capital. As 
the merchant insured risks with his company and the premiums 
written exhausted the amount of the original note, a new one 
was given adequate to cover the premium on risks which the 
merchant or shipowner anticipated insuring during the following 
six months. When a sufficient amount of these original notes 
were in hand to permit the commencement of business, the com- 
pany was organized by the election of trustees charged with the 
stewardship of the funds of the organization. These trustees 
in turn elected administrative officers who were charged with 
the operation of the enterprise. On the skill and ability of these 



354 MARINE INSURANCE 

men the success or failure of the company depended. It is 
apparent that in a hazardous enterprise such as marine under- 
writing, men operating a mutual company whose judgment 
of risks would be swayed by personal consideration of the in- 
dividual member of the company offering the risk, could quickly 
wreck the enterprise. The success of these companies rested in 
part on the selection of the better risks which the merchants had to 
oflfer, less desirable ones being placed by them in the open market. 
Distribution of Earnings. Scrip Certificates. — After a surplus 
commensurate with the size of the enterprise had been ac- 
cumulated, the question of the division of profits among the 
policy holders became of interest. It was not deemed prudent 
that the earnings of these organizations should be distributed 
as this would immediately impair the security behind the policies 
issued, so the plan of dividing the profits into shares but of tem- 
porarily withholding payment thereof was adopted. This was 
accompUshed in the following manner. When the profits of the 
calendar year were determined, the trustees of the company de- 
cided what proportion should be turned back to the assured. 
This amount being determined, was usually expressed as a fixed 
percentage of the net terminated premiums of the preceding 
year. The share to which each policy holder was entitled was 
determined by applying this percentage rate to the net terminated 
premiums of the particular assured. Net terminated premiums 
represent those on risks which have run off by the last day of 
the preceding year, less returns of premiums and cancellations. 
For the amount of profits so determined a so-called Scrip cer- 
tificate was issued which was signed by the President and the Sec- 
retary of the Company. It certified that the assured, his heirs, 
administrators or assigns were entitled to so many dollars of the 
earnings or profits of the said insurance company, the certificate 
to be redeemable at the pleasure of the trustees of the company, 
and to bear interest in the interim at a rate not to exceed, say 
six percent. It was further recited in the certificate that under 
certain circumstances, the certificates could be recalled and 
cancelled in whole or in part. These scrip certificates found a 
ready sale in the security market, their value and salability 
depending, of course, on the financial standing of the company 
issuing them. These documents thus became a liability of the 



BROKERS, MUTUAL COMPANIES 355 

company, except in so far as they could be reduced or cancelled if 
the company became financially embarrassed, but the company 
retained as working capital the profits represented by these 
certificates until they were redeemed. 

Redemption of Scrip. — ^After several annual issues of these 
scrip certificates had been made, it was customary for the trustees 
of the company to order the redemption of the oldest issue, the 
certificates being surrendered to the company in exchange for 
cash equal to their face value. From the time the annual 
redemption of certificates commenced, the new issue of scrip 
which became a liability of the company would be offset in part 
at least by the redemption of a previous issue which thus ceased 
to be a liability of the company. If the volume of business of a 
company varied little from year to year and the underwriting 
profits were moderately uniform, it is obvious that the assets 
and liabilities of a mutual company would vary little from year 
to year. If, however, the business showed a constant increase 
from year to year and the percentage of profit remained uniform, 
the assets of a company would grow, since the new issue of scrip 
would naturally be larger than the issue redeemed. Further- 
more, prudence would require that, with the expansion of busi- 
ness, there be a corresponding addition to the safety fund known 
as surplus or undivided profits. 

Policy Holders not Subject to Assessment. — The policyholders 
in a mutual marine company are not subject to assessment if the 
company meets with reverses, their sole loss in such case being 
the wiping out of these divided but undistributed profits rep- 
resented by the scrip certificates. Of course, if the policy 
holder has transferred his scrip certificate such loss would fall 
on the present holder of the security. The profits of a mutual 
company, it will be observed, are not divided on the basis of the 
individual policy, but on the results of the entire transactions 
of the company. The company reserves the right to withhold 
the issuance of scrip to any policy holder who is in default in 
the payment of premiums, so that this method of dividing profits 
furnishes in this respect an added protection to the company. 
Mutual companies are, of course, subject to the same state con- 
trol as are the stock companies, so that any danger of misfeasance 
on the part of trustee or officer is reduced to a minimum. 



CHAPTER 22 
OFFICE ORGANIZATION, THE ANNUAL STATEMENT 

Departmental Organization. — Young men in entering a marine 
insurance office to begin their chosen hfe work are quite apt, 
after a short preliminary training, to be placed in some depart- 
ment where they may remain for several years. They become 
expert in the work of that one department but too often lose 
sight of the relation which their particular work bears to the 
business as a whole. They thus become mere cogs in a machine, 
rather than men who see their particular work as an essential 
and integral part of the business as a whole. It would therefore 
seem pertinent to sketch in outline at least the organization of a 
marine underwriting office, so that those engaged in the business, 
who are for the present working in what seems to be a rut, may 
receive an insight into the work of each particular department, 
and thus be able by diligent study to prepare themselves for 
more important responsibiUties. The accompanying chart 
wm give some idea of the organization of a marine insurance 
company, showing the relation of the various departments. 

Purpose of Records. — The names by which individual de- 
partments are called in this discussion may not be those used in 
every insurance office. However, the duties described are the 
essential steps in the passage of a risk through the office from the 
time it is accepted by the underwriter, until in the event of loss, 
claim is made and paid under the policy of insurance. The 
records prepared by these departments are necessary to properly 
account for particular phases of the business, and are so coor- 
dinated as to show the operating results of the company as a 
whole, as set forth in the annual reports which must be made to 
the insurance departments of the various states. 

Organization Divided into Three Sections. — ^The conduct of 
a marine insurance office may be divided into three executive 
functions, those of underwriting, loss adjusting and accounting 
and financial management. Controlling these three executive 

356 



OFFICE ORGANIZATION 



367 



divisions are the officers of the company, each specializing in 
and charged with the conduct of some particular part of the 
company's activities, these men being in turn responsible 





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Stock. 
Holder! 

OrbClllliMldMB 








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Directors 

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Trastees 








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[Jnderwritinf 
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Loss 
Vice- 
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Treasarer 


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Stock or 
Scrip 

Transfer 
Dept. 






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Qnderwritlni 




Appralalng 




Loss 
Adjusting 




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Line 

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Policy 

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Accounting 
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Annnal 
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through the chief executive to the trustees or directors of the 
company. 

Underwriting Department. — Risks when presented to the 
company by a broker or assured are considered by one of 



358 MARINE INSURANCE 

the underwriting officers or by some member of the staff , known 
as an underwriter, who is specially authorized to consider risks 
and to make contracts of insurance with the assured. However, 
before the underwriter can inteUigently consider the risk he must 
have particulars of the carrying vessel, its location and its present 
condition. This information he may obtain for himself by con- 
sulting the classification books and the maritime lists, but it is 
preferable to have a separate department for this work known 
as the inspection department. 

Inspection Department. — The inspection department is usually 
in charge of men who have had actual sea experience or who 
have received their preliminary training as ship or engine con- 
structors. Associated with them are assistants who mark at the 
foot of the appUcation from the classification books or from 
the private records of the company particulars of the vessel sub- 
mitted. The trained inspectors also advise the underwriters with 
respect to the merits of particular vessels' and when necessary 
make special surveys of vessels when doubt exists as to their 
fitness for the proposed voyage or cargo. Records of casualties 
are also kept in this department so that notice thereof may be 
given to the underwriters who otherwise might unwittingly ac- 
cept fines on a vessel already in trouble. 

Binders. — Receiving the appfication from the inspection 
department with the details of the vessel noted thereon, the 
underwriter either accepts or decUnes the risk. If the risk is 
decUned or if a rate is quoted which is not immediately accepted 
by the broker or assured, the application is known as an inquiry 
and is placed on file for future reference. If the rate named is 
acceptable the risk is bound and the binding appUcation or binder 
starts on its way through the books of the Company. The under- 
writing officers and the underwriters also negotiate for and draw 
up forms of applications for open poUcies which when mutually 
acceptable to the company and the assured become the basis from 
which the formal policy is written. 

Line or Excess Department. — From the underwriters the 
bmder passes to the fine or excess department where the risk is 
entered under the name of the carrying vessel. On the books or 
cards of this department all risks are catalogued by separate 
vessels and distinct voyages of each vessel. These records serve 



OFFICE ORGANIZATION 359 

a twofold purpose. First by them the total liability of the 
company on any individual risk is shown, so that in the event of 
casualty it is immediately known whether or not the company 
is interested and to what extent, and secondly and of more im- 
portance, by these records the UabiUty of the company is con- 
trolled. K the clerks making these records find that the under- 
writers have assumed a larger amount than the predetermined 
retention of the company, the matter is reported at once by them 
to the head of their department who may be charged with the 
procuring of reinsurance, or the report may be made to a separate 
department, known as the reinsurance department. The head 
of this department on receiving notice of the overUne, imme- 
diately endeavors to procure reinsurance to reduce the line down 
to the company's ordinary retention, if his general instructions 
cover the case, or if not, he submits the particulars to one of the 
officers for special instructions. In an office where several men 
are charged with the underwriting these line or excess books 
form a ready means of learning whether the company's under- 
writing capacity on a named vessel has been exhausted. The 
need of promptness and accuracy will be apparent in the conduct 
of this department. From these books declarations of reinsur- 
ance under excess reinsurance contracts are made. 

Customer's Records. — Having been recorded on the Une books 
of the company the binder passes to the entry or recording de- 
partment, where an entry is made under the name of the assured 
and the premium charged against the particular account. The 
clerks making entries in this way should have access to the office 
copy of the open poUcy so that, in addition to making a proper 
record of the risk, they may confirm that the risk as entered is in 
agreement with the terms and conditions of the policy. This 
puts upon them a considerable burden but offers to the entry- 
clerk an unusual opportunity of becoming familiar with the 
terms and conditions under which various commodities are in- 
sured. In other offices the binders are entered on sheets in 
chronological order and posted to another record under the name 
of the assiu'ed. Both of these operations may be. performed in 
one operation by the use of modern mechanical accounting 
machines used in connection with a loose-leaf system. Whatever 
the method of recording adopted in this department the object 



360 MARINE INSURANCE 

in view is to charge the premium against the individual customer's 
account. If the marine office is merely an agency, particulars of 
the customer's accounts will be furnished in more or less detail 
to the home office and from these the agent's balances are 
calculated. 

Certificate and Policy Departments. — If a certificate of the 
insurance is desired this document is drawn by the certificate 
clerk either before or after the recording of the risk. If the binder 
be a so-called special insurance as distinguished from a declara- 
tion under a floating poUcy, it may go to a separate department, 
known as the poUcy department, the chief duty of which is the 
writing of the policies of insurance. These documents as well 
as the certificates of insurance are usually produced on the 
typewriter, the head of the department being charged with the 
responsibihty of seeing that the documents as written are in 
accordance with the terms of the binder. The larger part of the 
poUcy department's work is the writing of the open contracts 
issued by the company and the special poUcies issued on hull 
risks, so that men in this department have an excellent opportu- 
nity of becoming familiar with the terms and conditions appl3dng 
to various kinds of risks. 

Collection Department. — ^At the end of each month the billing 
or collection department goes over the record of each assured 
and prepares a statement of the account for transmission to the 
assured. The detail of these statements is usually prepared in 
the recording department by the carbon process, the customer's 
records as a rule being in the loose-leaf form and typewritten. 
The collection department is charged with the duty of collecting 
the premiums due to the company and of following up delinquents. 
The premiums charged are transferred each month to the 
customer's ledgers where a record is kept of premiums charged, 
premiums collected, return premiiuns and cancellations allowed 
and return premiums and cancellations paid. When the assured 
remits for the premiums charged, the checks are delivered to 
the cashier who after properly crediting the various accounts 
deposits the inoney in the bank. This is, of course, the principal 
source of income of a marine insurance company. The second 
and less important source of income is that received from invested 
assets, that is dividends, interest or rents. 



OFFICE ORGANIZATION 361 

Participating Companies. — This in brief indicates the various 
steps in the passage of a risk through an insmrance office. If the 
company is one which shares its business with others through 
participating reinsurance, or if the office is that of a firm repre- 
senting several companies, each of which obtains a definite share 
of the risks accepted, detailed records of these risks will be made 
by some multigraph system, the share of each participating 
company being noted at the foot of one of the copies or borde- 
reaux as they are known. These are mailed to the main offices 
of the various participating companies who charge the agency 
with the premiums due and credit them from time to time as 
remittances are received. 

Loss Department. — The loss department of an insurance com- 
pany is operated for the purpose of adjusting and approving for 
payment or rejecting claims made on the company for loss or 
damage. It was observed that the inspection department kept 
a record of casualties in order that the underwriters might 
be informed of the present conditions of vessels offered for 
insurance. The mformation here recorded is again noted by the 
loss department, the amount at risk in the particular casualty 
being obtained from the line books and shown in connection with 
the record of the casualty. As soon as the facts of the particu- 
lar disaster are known with a reasonable degree of accuracy, 
an estimate of the probable amount for which the company 
will have to respond is noted against the record of the casualty 
and this amount is immediately transferred to other records as an 
estimated UabiUty of the company. This UabiUty remains until 
after a final adjustment, the loss is actually paid, or until after 
the procurement of additional facts it is determined that no 
claim will be made upon the company. 

Appraisers. — The loss department of a marine insurance com- 
pany usually consists of two sections. The one is a field force 
and ordinarily consists of men, expert in the appraisal of damaged 
goods. They examine damaged property and endeavor to make 
an amicable adjustment of the loss without resorting to the 
expense and uncertainty of a sale at public auction. If the 
question of ship's UabiUty for the loss is involved these appraisers 
usually call into consultation the expert ship men from the 
underwriter's inspection department. If the case is one of hull 



362 MARINE INSURANCE 

damage these ship experts take the place of the appraisers and 
make a survey of the damage and estimate the cost of restoring 
the vessel to its former condition. 

Loss Adjusters. — The second section of a loss department is 
concerned with the actual adjustment of loss. When claims 
are presented, the loss adjusters obtain the necessary dociunents 
and proofs of loss, hold interviews with the assured, and after 
procuring the essential facts in the case, prepare the statement of 
the loss and submit it for the approval of the assured. Usually 
the men in a loss department specialize in certain forms of adjust- 
ments, one man adjusting particular average claims on cargoes, 
another such claims on hull, a third total loss claims while at 
least one man will be expert in the subject of general average, 
examining and criticizing or approving these statements as sub- 
mitted by the general average adjusters. The statement of loss 
having been made to the satisfaction of underwriter and assured 
it is approved for payment by the chief loss adjuster of the 
company, who is usually one of the executive officers. The 
statement is then presented to the cashier's department for 
payment. 

Financial Department. — The third general division of a marine 
insurance company, of which the cashiers are a part, is known as 
the financial department. This department is charged with 
the conduct of the financial books of the company, and all the 
operations of the company both underwriting and adjusting, as 
has been indicated, finally reach this department to be entered 
on the financial ledgers of the company. The department is also 
charged with the custody of the fimds and investments of the 
company, the responsibiUty resting on the Secretary-Treasurer 
of the company who is directly answerable to the chief executive 
of the company and through him to the trustees or directors. 

Cashier's Department. — The cashier's department is charged 
with the duty of recording the detail of all the receipts and dis- 
bursements of the company, in such manner that they can be 
transferred in summarized form to the books of the accounting 
department. While the detail in this department is considerable 
it is simplified by keeping separate records of income and dis- 
bursement items and by segregating the same into various sub- 
classifications. By the use of loose-leaf devices this information 



OFFICE ORGANIZATION 363 

may be so tabulated as to be readily available for the use of the 
accounting department. 

Transfer Department. — ^A separate section of the financial 
department may be charged with keeping the records of the 
the capital stock of the company or of the outstanding scrip if 
the company be conducted on the mutual plan. Here transfers 
of the ownership of stock or scrip are made, the old certificates 
being cancelled and new ones issued in their place. Here also 
are made the disbursements of the earnings of the company in the 
form of dividends on capital stock, or in the payment of interest 
on scrip or its redemption. 

Accounting Department. — ^The accounting department receiv- 
ing day by day in smnmarized form the results of the financial 
transactions conducted by the cashiers, transfers them to the 
financial ledger, which as a matter of convenience is usually kept 
in such form that the results obtained will meet the requirements 
of the statements which must be furnished to the various state 
insurance departments. This financial ledger is usually under 
the immediate control of the auditor of the company, whose 
position is one of considerable responsibility. Not only is he 
charged with the auditing of the various accounts of the com- 
pany, but he is also required to be f amiUar with the laws of the 
various states in which the company is licensed to do business so 
that the annual statements made may conform strictly to the 
special requirements of the particular state. Furthermore, 
the question of taxation comes within his duties and the various 
problems created by the multipUcity of tax laws, city, state and 
national must be understood and mastered by him. 

Agency Department. — There will usually be found in the office 
of a marine insurance company a department charged with the 
conduct of the agencies of the company. This department is 
under the inmiediate supervision of one of the officers. It may 
also conduct such business as is presented to the company not in 
person but through the mail. 

Statistical Department. — ^Another department, that of statis- 
tics, is from the underwriting viewpoint the most vital depart- 
ment in the office, for here are produced the figures which show 
precisely the profit or loss on the various accounts or on the 
various classes of risks which the company is insuring. It will be 



364 MARINE INSURANCE 

observed that maiine underwriting is not strictly scientific 
in the sense that life insurance is. In this latter branch of 
insurance practice there has been worked out in the mortality 
tables a predetermined and accurate table of the results which 
may be expected in the insurance of Uves. The life underwriter 
is deaUng with conditions that are stable and within reasonable 
limits subject to little fluctuation, perhaps the only undetermined 
factors in his problem being the possibility of unusually heavy 
mortaUty through war, pestilence or some cataclysm involving 
a large portion of the territory in which he operates. But these 
unusual conditions are so rare as to be almost negligible. 

Marine Insurance Not an Exact Science. — ^The marine under- 
writer on the other hand is dealing with risks which are not 
eflfected by the ordinary stable conditions that are encountered 
every day, but with those frequent but nevertheless disturbed 
conditions which are encountered on the seas. No chart or table 
can be devised which will show to a nicety how many days will 
be clear and how many stormy or which will measure the severity 
and direction of these storms. The marine underwriter is dealing 
with condition over which the veil of the future is drawn and he 
must rely on past conditions in order to arrive at his conclusions 
of what probably will happen in the future. Furthermore, owing 
to the unusual physical conditions to which maiine risks are 
subjected, the experience upon which the underwriter depends 
must extend over a considerable period of time, ten years perhaps 
being the shortest period from which reasonably accurate fore- 
casts can be made of what the future has in store. Years of 
great disaster seem to run in cycles and after a long period of 
relative freedom from excessive losses, a period will follow in 
which disaster follows on disaster with incredible rapidity caus- 
ing unusual and terribly costly results to marine underwriters. 

Preparation of Statistics. — ^The work then of this statistical 
department is to so tabulate the results of the company's business, 
that from the results shown over a considerable period of years 
the underwriter can see what the past has revealed and make 
some forecast of what the future will be. To this end there must 
flow into this department full particulars of each and every 
risk accepted by the company together with particulars of return 
premiums and cancellations. From the loss department informa- 



OFFICE ORGANIZATION 365 

tion must be gathered of all losses paid, showing the cause of loss 
and other necessary information. This department must also 
furnish for statistical purposes particulars of recoveries made in 
the nature of salvage so that the net loss results may be obtained. 
A comparison of the net premiums received and of the net losses 
paid will indicate the percentage of profit or loss on the bare 
underwriting of the company, whether this be looked upon from 
the viewpoint of individual assured, kind of goods, routes of 
trade or from any other angle from which it is desired to analyze 
the business. 

Deductions. — The bare underwriting result is now further 
reduced by a percentage of net premium income calculated to 
cover overhead charges for conducting the business including 
items of salary, office rent, stationery, taxes, brokerage and various 
other expenses which are essential to the conduct of a going con- 
cern. . In this manner the final result of underwriting operations 
is arrived at. It will have been observed that no notice has been 
taken of the cost of reinsurance which a company procures for 
its own protection nor of the recoveries made under such rein- 
surance. The reason for this is that the underwriter seeks infor- 
mation as to the experience of the business which he writes com- 
pared with the losses which he pays after which is deducted the 
expense of doing business. The reinsurance which he procures 
does not alter this experience. While it may, it is true, increase 
his net profits if reinsurance recoveries exceed reinsurance pre- 
mium payments, on the other hand, if reinsiu'ance premimn pay- 
ments exceed the recoveries the net profits of the business will be 
reduced. It will then be apparent that in determining experience, 
reinsurance is an item which can be safely disregarded. Con- 
sideration of reinsurance figures over a long period of years will 
indicate whether or not it has been profitable for the company 
to reinsure and may aid in drawing conclusions as to whether 
or not the company could prudently retain larger lines than 
has been the practice. As a matter of pure experience on the 
outcome of individual classes of business, however, these figures 
are of little importance. It will, of course, be understood, that 
in this connection it would be entirely proper in the case of share 
reinsurance, where a company under treaty turns over to other 
underwriters a share of all or of a portion of its business, to con- 

25 



366 MARINE INSURANCE 

sider in statistical figures only the net retention and the net loss 
paid, as the expense of doing business must be paid out of the net 
and not the gross premium. In such cases the original company 
is merely acting as a distributor of the risk. The reinsurance, 
which may be disregarded, is special or excess reinsurance which 
the company may place from time to time to reduce its liability. 

Statistics Must be Accurate. — It is quite true that the annual 
income and expense statement of the company will indicate 
whether operations have been profitable or otherwise, but this 
statement will not point out the strong or the weak points in the 
underwriting operations of the organization. The statistical 
department alone can do this by its system of analysis, and the 
value of the results thus produced will depend largely on the 
accuracy of the figures furnished and the ability by analysis to 
sift thoroughly the case in question in order to learn the exact 
cause of an unprofitable outturn of any particular class of risk. 
The statistical department is the laboratory of the insurance 
company. 

Annual Statement. — The office routine does not end here. One 
further step is necessary. The company must make a report of 
its operations in detail to the state in which it is incorporated and 
to every other state in which it has been Ucensed to do business. 
The state reports have been partially standardized by the various 
insurance departments, so that the report made to the state in 
which the company is domiciled will serve as the basis of the 
report made to each other state. The principal difference in the 
reports is in the requirements for the make up of reinsurance 
deductions from Uabilities and in that section of the statement 
referring solely to operations in the particular state for which 
the repfort is intended. The preparation of 'these reports never- 
theless requires no little degree of skill as the insiu*ance laws of 
the various states are not uniform, and a thorough knowledge 
of them is requisite in order that the information entered under 
the various headings may be reported in accordance with the 
requirements of the laws of the particular state in question. 

Income and Disbursements. — The purpose of the annual 
statement to the insurance department is to prepare a pubUc 
record which will show the transactions of the insurance company 
in such detail that the insuring public, by a perusal and analysis 



OFFICE ORGANIZATION 367 

of the figures, may determine not only the financial stability of 
the organization, but also gain a fair idea whether or not the 
company is being operated in a conservative manner. To this 
end various statements are included, the first showing the income 
and disbursement account of the company. The theory under- 
lying this section of the report is that the assets on December 
31st of the previous year plus the income actually received during 
the year minus the disbursements actually made during the same 
period will equal the assets at the end of the year. 

Assets and Liabilities. — ^Another section of the report shows 
the assets and liabihties of the company, sufficient detail being 
given to indicate the nature of the securities or property in which 
the assets of the company are invested. The Uabihties of the com- 
pany are also shown in sufficient detail to permit careful analy- 
sis to be made of the statement. Among the items of liabilities 
will be found the reserve set aside for the payment of estimated 
and unadjusted losses, an item of considerable importance in 
the case of marine companies, since, owing to the far-reaching 
scope of marine insurance considerable time often elapses between 
the happening of a loss and the payment of the claim. Upon 
the sufficiency of this reserve depends in large measure the 
stability of the company. Another liability item of considerable 
size is the unterminated premium reserve. The last item under 
the liabilities will be a balancing figure called surplus. This 
item added to the capital stock or the amount of outstanding 
scrip, if the company be mutual, will indicate the surplus as 
respects the policy holders. The assets as shown in this section 
will equal the balance arrived at in the statement of income and 
disbursements, by means of adding to the assets on hand at the 
beginning of the year, the total income actually received during 
the current year and deducting from the total thus obtained 
the total disbursements actually made during the same period. 
There is added to this statement of ledger assets, as it is called, 
certain other items called non-ledger assets which represent cred- 
its due to the company but not yet paid, such as accrued interest 
and rents, the difference between the book and market value of 
securities and similar items. From the total assets thus obtained 
are deducted other items such as company stock owned, out- 
standing bills overdue, unsecured loans, book value of securities 



368 MARINE INSURANCE 

over market value and similar items, the net result representing 
the admitted assets of the company. 

Underwriting and Investment Exhibit. — ^A number of general 
interrogatories, in relation to the risks underwritten by the com- 
pany and the nature of the premiums received follow, together 
with a statement of the business actually written in the state to 
which the report is being made. There is then presented what is 
called the underwriting and investment exhibit, which is in effect, 
a profit and loss statement showing in detail the increase or 
decrease in the surplus of the company during the year. In this 
statement the net increase or decrease in surplus is determined by 
considering. 

1. Gain or loss from underwriting. 

2. Gain or loss from investments. 

3. Gain or loss from miscellaneous causes. 

From this statement is indicated the percentage of losses in- 
cmred to premium earned, investment expenses incurred to 
interest and rents earned, and also the percentage of general 
expenses incurred to income received. 

Schedules. — The remainder of the state report consists of 
schedules showing in detail the investments of the company at 
the end of the year and the income therefrom, together with 
sales and purchases of same during the year, the bank balances of 
the company and the interest received thereon and similar details 
of asset items appearing in the statement of assets as total figures 
only. However, the pubUc is not altogether dependent on these 
state reports for its information as to the stabiUty of insurance 
companies. The state department not only carefully peruses and 
analyzes the statements furnished, but from time to time makes 
thorough individual examinations of the companies, verifying the 
accm^acy of all the items entered in the reports, and the truth of 
any statements made therein. Furthermore the question of 
loss and premium reserves is a particular object of attention 
and if necessary the company is required to increase these 
Uabilities. 

Publicity in Insurance. — ^Any detailed discussion of the 
accounting problems involved in the conduct of an insurance 
company is not within the province of this book, nevertheless 
the annual statements and the special reports to the insurance 



OFFICE ORGANIZATION 369 

departments are well worthy of study in that they reveal to the 
assured and to the broker, as well as to the underwriter who may 
be seeking reinsurance, an accurate idea of the stability of the 
various companies and of the security back of the poUcies which 
they issue. The modern idea of publicity so pervades the 
business of insurance and the standing of the companies is so 
clearly set forth in these records, which are open to the pubUc, 
that there would seem to be no reason why an assured who cares 
to inform himself should not avoid the acceptance of insurance 
in companies of doubtful stabiUty. 



APPENDIX A 



Standard Application Form Used in Placing Special Risks on Cargo 



CERTinCATES REQUIRED 

(Indicate by check) 

Orifinal 

DapKcato 

Triplicate 



CARGO APPUCATION 
SPECIAL RISK 

mi Wnkan Wm ufV 



Definite \^'^^> 



Applhathn Jor Insurance Is hereby made hf 

In name rf - — - 

Lmi, tfargf, payahU l» 



Ft the amnad $tattd hehw, on- 
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At end ftem 



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Amount tmJer dedt $■ 

Amount on deck S 

Brokerage- 
Nero York» 



■Rate 
Rate. 



-per cenL 
per eertL 



per omL 
^.191 



Binding 

Binding 

{Front side) 
370 



-for Compare 
for AppUeant 



APPENDIX _ 371 



A'p'pendix A continued 

1. Warranted free of capture, seizure, arrest, restraint, or detainment, and the 
consequences thereof or of any attempt thereat^ {piracy excepted), and also 
from all consequences of hostilities or war-like operations, whether before or 
after declaration of war. 

2. Warranted free of bss or damage caused hf strikers, locked out workmen or 
persons taking part in labor disturbances or riots or civil commotions. 

3. General Average and Salvage Charges payable according to Foreign Statement 
or per York>Antwerp Rules if in accordance with the contract of affreightment 

4 Held covered, at a premium to be arranged, in case of deviation or change of 
voyage or of anjF omission or error in the dcKription of the interest, vessel or 
voyage. 

5. Including (subject to the terms of tiie Policy) all risks covered by this Poliqr 
from shippers or Manufacturers' warehouse until on board the vessel^ during 
transhipment if any, and from the vessel., whilst on quays, wharves or in sheds 
during the ordinary course of transit until safely deposited in consignees' or 
other warehouse at destination named b Policy, except that in respect to ship- 
ments to the River Plate, the risks under this insurance shall cease upon arri^ 
at any Shed (transit or otherwise). Store, Custom House or Warehouse, or upon 
the expiry of ten (10) days, subseq^tfnt to Iknding, whichever may first occur 

6. Including risk of craft, raft and/or lighter to and from the vessel Each craft, 
raft, and/or lighter to be deemed a separate insurance. The Assured are not to 
be prejudiced by any agreement exempting lightermen from liability. 

7. Including all liberties as per contract of affreightment The Assured are not to 
be prejudiced by the presence of the negligence clause and/or latent defect clause 
in the Bills of Lading and/or Charter Party. The seaworthiness of the vessel as 
between the Assured and the Assurers is hereby admitted. 

8. Warranted not to cover the interest of any partnership, corporation, association 
or person, insurance for whose account would be contrary to the Trading with 
the Enemy Acts or other statutes or prohibitions of the United States and/or 
British (jovemments. 




(Reverse side of standard application form) 



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APPENDIX E 

MARINE INSURANCE ACT, 1906 

[6 Edw. 7. Ch. 41] 



ARRANGEMENTS OF SECTIONS 



Marine Insurance 
Section 

1. Marine insurance defined. 

2. Mixed sea and land risks. 

3. Marine adventure and maritime perils defined. 

Insurable Interest 

4. Avoidance of wagering or gaming contracts. 

5. Insurable interest defined. 

6. When interest must attach. 

7. Defeasible or contingent interest. 

8. Partial interest. 

9. Re-insurance. 

10. Bottomry. 

11. Master's and seamen's wages. 

12. Advance freight. 

13. Charges of insurance. 

14. Quantimi of interest. 

15. Assignment of interest. 

Insurable Vcdue 

16. Measure of insurable value. 

Disclosure and RepreserUations 

17. Insurance is uberrimae fidei. 

18. Disclosure by assured. 

19. Disclosure by agent effecting insurance. 

20. Representations pending negotiation of contact. 

21. When contract is deemed to be concluded. 

387 



388 MARINE INSURANCE 

The Policy 
Section 

22. Contract must be embodied in policy. 

23. What policy must specify. 

24. Signature of insurer. 

25. Voyage and time policies. 

26. Designation of subject-matter. 

27. Valued policy. 

28. Unvalued policy. 

29. Floating policy by ship or ships. 

30. Construction of terms in policy, 

31. Premium to be arranged. 



32. Double insurance. 



Double Insurance 



WarrantieSf cfec. 



33. Nature of warranty. 

34. When breach of warranty excused. 

35. Express warranties. 

36. Warranty of neutrality. 

37. No implied warranty of nationality. 

38. Warranty of good safety. 

39. Warranty of seaworthiness of ship. 

40. No implied warranty that goods are seaworthy 

41. Warranty of legality. 

The Voyage 

42. Implied condition as to commencement of risk. 

43. Alteration of port of departure. 

44. Sailing for different destination. 

45. Change of voyage. 

46. Deviation. 

47. Several ports of discharge. 

48. Delay in voyage. 

49. Excuses for deviation or delay. 

Assignment of Policy 

50. When and how policy is assignable. 

51. Assured who has no interest cannot assign. 

The Premium 

52. When premium payable. 

53. Policy effected through broker. 

54. Effect of receipt on policy. 



APPENDIX 389 

Loss and Abandonment 

55. Included and excluded losses. 

56. Partial and total loss. 

57. Actual total loss. 

58. Missing ship. 

59. Effect of transhipment, &c. 

60. Constructive total loss defined. 

61. Effect of constructive total loss. 

62. Notice of abandonment. 

63. Effect of abandonment. 

Partial Losses (Including Salvage and General A verage and 

Particular Charges) 

64. Particular average loss. 

65. Salvage charges. 

66. General average loss. 

Measure of Indemnity 

67. Extent of liability of insurer for loss. 

68. Total loss. 

69. Partial loss of ship. 

70. Partial loss of freight. 

71. Partial loss of goods, merchandise, &c. 

72. Apportionment of valuation. 

73. General average contributions and salvage charges. 

74. Liabilities to third parties. 

75. General provisions as to measure of indemnity. 

76. Particular average warranties. 

77. Successive losses. 

78. Suing and labouring clause. 

Rights of Insurer on Payment 

79. Right of subrogation. 

80. Right of contribution. 

81. Effect of under insurance. 

Return of Premium 

82. Enforcement of return. 

83. Return by agreement. 

84. Return for failure of consideration. 

Mutual Insurance 

85. Modification of Act in case of mutual insurance. 



390 MARINE INSURANCE 

Supplemental 

86. Ratification by assured. 

87. Implied obligations varied by agreement or usage. 

88. Reasonable time, Ao, a question of fact. 
89l Slip as evidence. 

90. Interpretation of terms. 

91. Savings. 

92. Repeals. 

93. Commencement. 

94. Short title. 
Schedules. 



A.D. 1906. 

An Act to codify the Law relating to Marine Insurance. 

[December 21, 1906.] 

Be it enacted by the King's most Excellent Majesty, by and with the 

advice and consent of the Lords Spiritual and Temporal, and Commons, in 

this present Parliament assembled, and by the authority of the same, as 

follows: — 

Marine Insurance 

Marine Insurance Defined. 

1. A contract of marine insurance is a contract whereby the insurer 
undertakes to indemnify the assured, in manner and to the extent thereby 
agreed, against marine losses, that is to say, the losses incident to marine 
adventure. 

Mixed Sea and Land Bisks. 

2. (1) A contract of marine ins^irance may, by its express terms, or by 
usage of trade, be extended so as to protect the assured against losses on 
inland waters or on any land risk which may be incidental to any sea voyage. 

(2) Where a ship in course of building, or the launch of a ship, or any 
adventure analogous to a marine adventure, is covered by a policy in the 
form of a marine policy, the provisions of this Act, in so far as applicable, 
shall apply thereto; but, except as by this section provided, nothing in this 
Act shall alter or affect any rule of law applicable to any contract of insur- 
ance other than a contract of marine insurance as by this Act defined. 
Marine Adventure and Maritime Perils Defined. 

3. (1) Subject to the provisions of this Act, every lawful marine ad- 
venture may be the subject of a contract of marine insurance. 

(2) In particular there is a marine adventure where — 

(a) Any ship goods or other movables are exposed to maritime perils. 
Such property is in this Act referred to as "insurable property;" 
. (b) The earning or acquisition of any freight, passage money, com- 
mission, profit, or other pecuniary benefit, or the security for any 
advances, loan, or disbursements, is endangered by the exposure 
of insurable property to maritime perils; 



APPENDIX 391 

(c) Any liability to a third party may be incurred by the owner of, 
or other person interested in or responsible for, insurable property, 
by reason of maritime perils. 
'^ Maritime perils'' means the perils consequent on, or incidental to, the 
navigation of the sea, that is to say, perils of the seas, fire, war perils, pirates, 
rovers, thieves, captures, seizures, restraints and detainments of princes and 
peoples, jettisons, barratry, and any other perils, either of the like kind or 
which may be designated by the policy. 

Insurable Interest 

Avoidance of Wagering or Gaming Contracts. 

4. (1) Every contract of marine insurance by way of gaming or wagering 
is void. 

(2) A contract of marine insurance is deemed to be a gaming or wagering 
contract — 

(a) Where the assured has not an insurable interest as defined by 
this Act, and the contract is entered into with no expectation of 
acquiring such an interest; or 

(b) Where the policy is made "interest or no interest," or "without 
further proof of interest than the policy itself," or "without bene- 
fit of salvage to the insurer," or subject to any other like term: 

Provided that, where there is no possibility of salvage, a policy may be 
effected without benefit of salvage to the insurer. 
Insurable Interest Defined. 

6. (1) Subject to the provisions of this Act, every person has an insurable 
interest who is interested in a marine adventure. 

(2) In particular a person is interested in a marine adventure where he 
stands in any legal or equitable relation to the adventure or to any insurable 
property at risk therein, in consequence of which he may benefit by the 
safety or due arrival of insurable property, or may be prejudiced by its loss, 
or by damage thereto, or by the detention thereof, or may incur liability 
in respect thereof. 
When Interest Must Attach. 

6. (1) The assured must be interested in the subject-matter insured at 
the time of the loss though he need not be interested when the insurance is 
effected : 

Provided that where the subject-matter is insured "lost or not lost," the 
assured may recover although he may not have acquired his interest until 
after the loss, unless at the time of effecting the contract of insurance the 
assured was aware of the loss, and the insurer was not. 

(2) Where the assured has no interest at the time of the loss, he cannot 
acquire interest by any act or election after he is aware of the loss. 
Defeasible or Contingent Interest. 

7. (1) A defeasible interest is insurable, as also is a contingent interest. 
(2) In particular, where the buyer of goods has insured them, he has an 

insurable interest, notwithstanding that he might, at his election, have 



392 MARINE INSURANCE 

rejected the goods, or have treated them as at the seller's risk, by reason of 
the latter's delay in making delivery or otherwise. 
Partial Interest. 

8. A partial interest of any nature is insurable. 
Reinsurance. 

9. (1) The insurer under a contract of marine insurance has an insurable 
interest in his risk, and may reinsure in respect of it. 

(2) Unless the policy otherwise provides, the original assured has no 
right or interest in respect of such reinsurance. 
Bottomry. 

10. The lender of money on bottomry or respondentia has an insurable 
interest in respect of the loan. 

Master's and Seamen's Wagesl 

11. The master or any member of the crew of a ship has an insurable 
interest in respect of his wages. 

Advance Freight. 

12. In the case of advance freight, the person advancing the freight has 
an insurable interest, in so far as such freight is not repayable in case of loss. 
Charges of Insurance. 

13. The assured has an insurable interest in the charges of any insurance 
which he may effect. 

Quantum of Interest. 

14. (1) Where the subject-matter insured is mortgaged, the mortgagor 
has an insurable interest in the full value thereof, and the mortgagee has an 
insurable interest in respect of any sum due or to become due under the 
mortgage. 

(2) A mortgagee, consignee, or other person having an interest in the 
subject-matter insured may insure on behalf and for the benefit of other 
persons interested as well as for his own benefit. 

(3) The owner of insurable property has an insurable interest in respect 
of the full value thereof, notwithstanding that some third person may have 
agreed, or be liable, to indemnify him in case of loss. 

Assignment of Interest. 

16. Where the assured assigns or otherwise parts with his interest in the 
subject-matter insured, he does not thereby transfer to the assignee his 
rights under the contract of insurance, unless there be an express or implied 
agreement with the assignee to that effect. 

But the provisions of this section do not affect a transmission of mterest 
by operation of law. 

Insurable Value 

Measure of Insurable Value. 

16. Subject to any express provision or valuation in the policy, the in- 
surable v^lue of the subject-matter insured must be ascertained as follows: — 
(1) In insurance on ship, the insurable value is the value, at the com- 
mencement of the risk, of the ship, including her outfit, provisions and 
stores for the officers and cirew, money advanced for seamen's wages. 



APPENDIX 393 

and other disbursements (if any) incurred to make the ship fit for 
the voyage or adventure contemplated by the policy, plus the charges 
of insurance upon the whole: 

The insurable value, in the case of a steamship, includes also the 
machinery, boilers, and coals and engine stores if owned by the as- 
sured, and, in the case of a ship engaged in a special trade, the ordinary 
fittings requisite for that trade : 

(2) In insurance on freight, whether paid in advance or otherwise, the 
insurable value is the gross amount of the freight at the risk of the 
assured, plus the charges of insurance: 

(3) 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 : 

(4) In insurance on any other subject-matter, the insurable value is the 
amount at the risk of the assured when the policy attaches, plus the 
charges of insurance. 

Disclosure and Representations 

Insurance is Uberrimae Fidei. 

17. A contract of marine insurance is a contract based upon the utmost 
good faith, and, if the utmost good faith be not observed by either party, 
the contract may be avoided by the other party. 

Disclosure by Assured. 

18. (1) Subject to the provisions of this section, the assured must dis- 
close to the insurer, before the contract is concluded, every material cir- 
cumstance which is known to the assured, and the assured is deemed to 
know every circumstance which, in the ordinary course of business, ought 
to be known by him. If the assured fails to make such disclosure, the insurer 
may avoid the contract. 

(2) Every circumstance is material which would influence the judgment 
of a prudent insurer in fixing the premium, or determining whether he will 
take the risk. 

(3) In the absence of inquiry the following circumstances need not be 
disclosed, namely: — 

(a) Any circumstance which diminishes the risk; 

(6) Any circumstance which is known or presumed to be known to 
the insurer. The insurer is presumed to know matters of com- 
mon notoriety or knowledge, and matters which an insurer in the 
ordinary course of his business, as such, ought to know ; 

(c) Any circumstance as to which information is waived by the in- 
surer; 

(d) Any circumstance which it is superfluous to disclose by reason of 
any express or impUed warranty. 

(4) Whether any particular circumstance, which is not disclosed, be 
material or not is, in each case, a question of fact. 

(5) The term "circumstance" includes any communication made to, or 
information received by, the assured. 



394 MARINE INSURANCE 

Disclosure by Agent E£fectiiig Instirance. 

19. Subject to the provisions of the preceding section as to circumstances 
which need not be disclosed, where an insurance is effected for the assured 
by an agent, the agent must disclose to the insurer — 

(a) Every material circumstance which is known to himself, and an 
agent to insure is deemed to know every circumstance which in 
the ordinary course of business ought to be known by, or to have 
been communicated to, him; and 

(b) Every material circumstance which the assured is bound to dis- 
close, unless it come to his knowledge too late to communicate 
it to the agent. 

Representations Pending Negotiation of Contract. 

20. (1) Every material representation made by the assured or his agent 
to the insurer during the negotiations for the contract, and before the con- 
tract is concluded, must be true. If it be untrue the insurer may avoid the 
contract. 

(2) A representation is material which would influence the judgment of 
a prudent insurer in fixing the premium, or determining whether he will 
take the risk. 

(3) A representation may be either a representation as to a matter of 
fact, or as to a matter of expectation or belief. 

(4) A representation as to a matter of fact is true, if it be substantially 
correct, that is to say, if the difference between what is represented and what 
is actually correct would not be considered material by a prudent insurer. 

(5) A representation as to a matter of expectation or belief is true if it be 
made in good faith. 

(6) A representation may be withdrawn or corrected before the contract 
is concluded. 

(7) Whether a particular representation be material or not is, in each case, 
a question of fact. 

When Contract is Deemed to be Concluded. 

21. A contract of marine insurance is deemed to be concluded when the 
proposal of the assured is accepted by the insurer, whether the policy be 
then issued or not; and for the purpose of showing when the proposal was 
accepted, reference may be made to the slip or covering note or other cus- 
tomary memorandum of the contract, although it be unstamped. 

The Policy 

Contract Must be Embodied in Policy. 

22. Subject to the provisions of any statute, a contract of marine insur- 
ance is inadmissible in evidence unless it is embodied in a marine policy in 
accordance with this Act. The policy may be executed and issued either 
at the time when the contract is concluded, or afterwards. 

What Policy Must Specify. 

23. A marine policy must specify — 

(1) The name of the assured, or of some person who effects the in- 
surance on his behalf: 



APPENDIX 395 

(2) The subject-matter insured and the risk insured against: 

(3) The voyage, or period of time, or both, as the case may be, cov- 
ered by the insurance: 

(4) The sum or sums insured: 

(5) The name or names of the insurers. 
Signature of Insurer. 

24. (1) A marine policy must be signed by or on behalf of the insurer, 
provided that in the case of a corporation the corporate seal may be suffi- 
cient, but nothing in this section shall be construed as requiring the sub- 
scription of a corporation to be under seal. 

(2) Where a policy is subscribed by or on behalf of two or more insurers, 
each subscription, unless the contrary be expressed, constitutes a distinct 
contract with the assured. 
Voyage and Time Policies. 

25. (1) Where the contract is to insure the subject-matter at and from, 
or from one place to another or others, the policy is called a ''voyage policy," 
and where the contract is to insure the subject-matter for a definite period 
of time the policy is called a '' time policy." A contract for both voyage and 
time may be included in the same policy. 

(2) Subject to the provisions of section eleven of the Finance Act, 1901, 
a time policy which is made for any time exceeding twelve months is invalid. 
Designation of subject-matter. 

26. (1) The subject-matter insured must be designated in a marine 
policy with reasonable certainty. 

(2) The nature and extent of the interest of the assured in the subject- 
matter insured need not be specified in the policy. 

(3) Where the policy designates the subject-matter insured in general 
terms, it shall be construed to apply to the interest intended by the assured 
to be covered. 

(4) In the application of this section regard shall be had to any usage 
regulating the designation of the subject-matter insured. 

Valued Policy. 

27. (1) A policy may be either valued or unvalued. 

(2) A valued policy is a policy which specifies the agreed value of the 
subject-matter insured. 

(3) Subject to the provisions of this Act, and in the absence of fraud, 
the value fixed by the policy is, as between the insurer and assured, conclu- 
sive of the insurable value of the subject intended to be insured, whether 
the loss be total or partial. 

(4) Unless the policy otherwise provides, the value fixed by the policy is 
not conclusive for the purpose of determining whether there has been a 
constructive total loss. 

Unvalued Policy. 

28. An unvalued policy is a policy which does not specify the value of 
the subject-matter insured, but, subject to the limit of the sum insured, 
leaves the insurable value to be subsequently ascertained, in the manner 
herein-before specified. 



396 MARINE INSURANCE 

Floating Policy by Ship or Ships. 

29. (1) A floating policy is a policy which describes the insurance in 
general terms, and leaves the name of the ship or ships and other particulars 
to be defined by subsequent declaration. 

(2) The subsequent declaration or declarations may be made by indorse- 
ment on the policy, or in other customary manner. 

(3) Unless the policy otherwise provides, the declarations must be made 
in the order of dispatch or shipment. They must, in the case of goods, 
comprise aU consignments within the terms of the policy, and the value of 
the goods or other property must be honestly stated, but an omission or 
erroneous declaration may be rectified even after loss or arrival, provided 
the omission or declaration was made in good faith. 

(4) Unless the policy otherwise provides, where a declaration of value is 
not made imtil after notice of loss or arrival, the poUcy must be treated as 
an unvalued poHcy as regards the subject-matter of that declaration. 
Construction of Terms in Policy. 

30. (1) A policy may be in the form in the First Schedule to this Act. 
(2) Subject to the provisions of this Act, and unless the context of the 

policy otherwise requires, the terms and expressions mentioned in the First 
Schedule to this Act shall be construed as having the scope and meaning in 
that schedule assigned to them. 
Premium to be Arranged. 

31. (1) Where an insurance is effected at a premium to be arranged, 
and no arrangement is made, a reasonable premium is payable. 

(2) Where an insurance is effected on the terms that an additional pre- 
mium is to be arranged in a given event, and that event happens but no 
arrangement is made, then a reasonable additional premium is payable. 

Double Insurance 

Double Insurance. 

32. (1) 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. 

(2) Where the assured is over-insured by double insurance — 

(a) The assured, unless the policy otherwise provides, may claim 
payment from the insurers in such order as he may think fit, pro- 
vided that he is not entitled to receive any sum in excess of the 
indemnity allowed by this Act; 
(6) 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 poUcy without regard 
to the actual value of the subject-matter insured; 
(c) 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; 



APPENDIX 397 

{d) 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 them- 
selves. 

Warranties, &c. 

Nature of Warranty. 

33. (1) A warranty, in the following sections relating to warranties, 
means a promissory warranty, that is to say, a warranty by which the as- 
sured undertakes that some particular thing shall or shall not be done, or 
that some condition shall be fulfilled, or whereby he affirms or negatives the 
existence of a particular state of facts. 

(2) A warranty may be express or implied. 

(3) A warranty, as above defined, is a condition which must be exactly 
complied with, whether it be material to the risk or not. If it be not so 
complied with, then, subject to any express provision in the policy, the in- 
surer is discharged from liability as from the date of the breach of warranty, 
but without prejudice to any liability incurred by him before that date. 
When Breach of Warranty Excused. 

34. (1) Non-compliance with a warranty is excused when, by reason of 
a change of circumstances, the warranty ceases to be applicable to the cir- 
cumstances of the contract, or when compliance with the warranty is ren- 
dered imlawf ul by any subsequent law. 

(2) Where a warranty is broken, the assured cannot avail himself of the 
defence that the breach has been remedied, and the warranty complied 
with, before loss. 

(3) A breach of warranty may be waived by the insurer. 
Express Warranties. 

36. (1) An express warranty may be in any form of words from which 
the intention to warrant is to be inferred. 

(2) An express warranty must be included in, or written upon, the policy, 
or must be contained in some document incorporated by reference into the 
policy. 

(3) An express warranty does not exclude an implied warranty, unless 
it be inconsistent therewith. 

Warranty of Neutrality. 

36. (1) Where insurable property, whether ship or goods, is expressly 
warranted neutral, there is an implied condition that the property shall have 
a neutral character at the commencement of the risk, and that, so far as 
the assured can control the matter, its neutral character shall be preserved 
during the risk. 

(2) Where a ship is expressly warranted "neutral" there is also an implied 
condition that, so far as the assured can control the matter, she shall be 
properly documented, that is to say, that she shall carry the necessary papers 
to establish her neutrality, and that she shall not falsify or suppress her 
papers, or use simulated papers. If any loss occurs through breach of this 
condition, the insurer may avoid the contract. 

27 



398 MARINE INSURANCE 

No Implied Warranty of Nationality. 

87. There is no implied warranty as to the nationality of a ship, or that 
her nationality shall not be changed during the risk. 

Warranty of Good Safety. 

88. Where the subject-matter insured is wsLrranted "well" or ''in good 
safety '' on a particular day, it is sufficient if it be safe at any time during 
that day. 

Warranty of Seaworthiness of Ship. 

89. (1) In a voyage policy there is an implied warranty that at the com- 
mencement of the voyage the ship shall be seaworthy for the purpose of 
the particular adventure insured. 

(2) Where the policy attaches while the ship is in port, there is also an 
implied warranty that she shall, at the commencement of the risk, be reason- 
ably fit to encounter the ordinary perils of the port. 

(3) Where the policy relates to a voyage which is performed in different 
stagies, during which the ship requires different kinds of or further prepara- 
tion or equipment, there is an implied warranty that at the commencement 
of each stage the ship is seaworthy in respect of such preparation or equip- 
ment for the purposes of that stage. 

i.4) A ship is deemed to be seaworthy when she is reasonably fit in all 
respects to encounter the ordinary perils of the seas of the adventure insured. 

(5) In a time policy there is no implied warranty that the ship shall be 
seaworthy at any stage of the adventure, but where, with the privity of the 
assured, the ship is sent to sea in an unseaworthy state, the insurer is not 
liable for any loss attributable to unseaworthiness. 
No Implied Warranty that Goods are Seaworthy. 

40. (1) In a policy on goods or other movables there is no implied 
warranty that the goods or movables are seaworthy. 

(2) In a voyage policy on goods or other movables there is an implied 
warranty that at the commencement of the voyage the ship is not only sea- 
worthy as a ship, but also that she is reasonably fit to carry the goods or 
other movables to the destination contemplated by the policy. 
Warranty of Legality. 

41. There is an implied warranty that the adventure insured is a lawful 
one, and that, so far as the assured can control the matter, the adventure 
shall be carried out in a lawful manner. 

The Voyage 

Implied Condition as to Commencement of Risk. 

42. (1) Where the subject-matter is insured by a voyage policy "at 
and from'' or "from" a particular place, it is not necessary that the ship 
should be at that place when the contract is concluded, but there is an implied 
condition that the adventure shall be commenced within a reasonable time, 
and that if the adventure be not so commenced the insurer may avoid the 
contract. 

(2) The implied condition may be negatived by showing that the delay 



APPENDIX 399 

was caused by circumstances known to the insurer before the contract 
was concluded, or by showing *that he waived the condition. 
Alteration of Port of Departure. 

43. Where the place of departure is specified by the policy, and the ship 
instead of sailing from that place sails from any other place, the risk does 
not attach. 

Sailing for Different Destination. 

44. Where the destination is specified in the policy, and the ship, instead 
of sailing for that destination, sails for any other destination, the risk does 
not attach. 

Change of Voyage. 

46. (1) Where, after the commencement of the risk, the destination of 
the ship is voluntarily changed from the destination contemplated by the 
policy, there is said to be a change of voyage. 

(2) Unless the policy otherwise provides, where there is a change of voy- 
age, the insurer is discharged from liability as from the time of change, that 
is to say, as from the time when the determination to change it is manifested ; 
and it is immaterial that the ship may not in fact have left the course of 
voyage contemplated by the policy when the loss occurs. 
Deviation. 

46. (1) Where a ship, without lawful excuse, deviates from the voyage 
contemplated by the policy, the insurer is discharged from liability as from 
the time of deviation, and it is immaterial that the ship may have regained 
her route before any loss occurs. 

(2) There is a deviation from the voyage contemplated by the policy — 
(a) Where the course of the voyage is specifically designated by the 

policy, and that course is departed from ; or 
(6)* Where the course of the voyage is not specifically designated by 
the policy, but the usual and customary course is departed 
from. 

(3) The intention to deviate is immaterial; there must be a deviation in 
fact to discharge the insurer from his liability under the contract. 
Several Ports of Discharge. • 

47. (1) Where several ports of discharge are specified by the policy, 
the ship may proceed to all or any of them, but, in the absence of any usage 
or sufficient cause to the contrary, she must proceed to them, or such of 
them as she goes to, in the order designated by the policy. If she does not 
there is a deviation. 

(2) Where the policy is to "ports of discharge," within a given area, which 
are not named, the ship must, in the absence of any usage or sufficient cause 
to the contrary, proceed to them, or such of them as she goes to, in their 
geographical order. If she does not there is a deviation. 
Delay in Voyage. 

48. In the case of a voyage policy, the adventure ^sured must be prose- 
cuted throughout its course with reasonable despatch, and, if without lawful 
excuse it is not so prosecuted, the insurer is discharged from liability as 
from the time when the delay became unreasonable. 



400 MARINE INSURANCE 

Bzcttses for Deviation or Delay. 

49. (1) Deviation or delay in prosecuting the voyage contemplated by 
the policy is excused — 

(a) Where authorized by any special term in the policy; or 

(&) Where caused by circumstances beyond the control of the master 

and his employer; or 
(c) Where reasonably necessary in order to comply with an express 

or implied warranty; or 
{d) Where reasonably necessary for the safety of the ship or subject- 
matter insured ; or 
(e) For the purpose of saving human life, or aiding a ship in distress 

where human life may be in danger; or 
(/) Where reasonably necessary for the purpose of obtaining medical 

or surgical aid for any person on board the ship; or 
(g) Where caused by the barratrous conduct of the master or crew, 
if barratry be one of the perils insured against. 
(2) When the cause excusing the deviation or delay ceases to operate, the 
ship must resume her course, and prosecute her voyage, with reasonable 
despatch. 

Aasignment of Policy 

When and How Policy is Assignable. 

60. (1) A marine policy is assignable unless it contains terms expressly 
prohibiting assignment. It may be assigned either before or after loss. 

(2) Where a marine policy has been assigned so as to pass the beneficial 
interest in such policy, the assignee of the policy is entitled to sue thereon 
in his own name; and the defendant is entitled to make any defence arising 
out of the contract which he would have been entitled to make if the action 
had been brought in the name of the person by or on behalf of whom the 
policy was effected. 

(3) A marine policy may be assigned by indorsement thereon or in other 
customary manner. 

Assured Who Has no Interest Cannot Assign. 

61. Where the assured has parted with or lost his interest in the subject- 
matter insured, and has not, before or at the time of so doing, expressly or 
impliedly agreed to assign the policy, any subsequent assignment of the 
policy is inoperative; 

Provided that nothing in this section affects the assignment of a policy 
after loss. 

The Premium 
When Premium Payable. 

62. Unless otherwise agreed, the duty of the assured or his agent to pay 
the premium, and the duty of the insurer to issue the policy to the assured or 
his agent, are concurrent conditions, und the insurer is not bound to issue 
the policy imtil payment or tender of the premium. 

Policy Effected Through Broker. 

63. (1) Unless otherwise agreed, where a marine policy is effected on 



APPENDIX ' 401 

behalf of the assured by a broker, the broker is directly responsible to the 
insurer for the premium, and the insurer is directly responsible to the assured 
for the amount which may be payable in respect of losses, or in respect of 
returnable premium. 

(2) Unless otherwise agreed, the broker has, as against the assured, a lien 
upon the policy for the amount of the premium and his charges in respect of 
effecting the policy; and, where he has dealt with the person who employs 
him as a principal, he has also a lien on the policy in respect of any balance 
on any insurance account which may be due to him from such person, unless 
when the debt was incurred he had reason to believe that such person was 
only an agent. 
Effect of Receipt on Policy. 

64. Where a marine policy effected on behalf of the assured by a broker 
acknowledges the receipt of the premium, such acknowledgment is, in the 
absence of fraud, conclusive as between the insurer and the assured, but 
not as between the insurer and broker. 

Loss and Abandonment 

Included and Excluded Losses. 

66. (1) Subject to the provisions of this Act, and unless the policy other- 
wise provides, the insurer is liable for any loss proximately caused by a peril 
insured against, but, subject as aforesaid, he is not liable for any loss which 
is not proximately caused by a peril insured against. 
(2) In particular, — 

(a) The insurer is not liable for any loss attributable to the wilful 
misconduct of the assured, but, unless the policy otherwise pro- 
vides, he is liable for any loss proximately caused by a peril in- 
sured against, even though the loss would not have happened 
but for the misconduct or negligence of the master or crew ; 
(6) Unless the policy otherwise provides, the insurer on ship or goods 
is not liable for any loss proximately caused by delay, although 
the delay be caused by a peril insured against; 
(c) Unless the policy otherwise provides, the insurer is not liable for 
ordinary wear and tear, ordinary leakage and breakage, inherent 
vice or nature of the subject-matter insured, or for any loss proxi- 
mately caused by rats or vermin, or for any injury to machinery 
not proximately caused by maritime perils. 
Partial and Total Loss. 

66. (1) A loss may be either total or partial. Any loss other than a 
total loss, as hereinafter defined, is a partial loss. 

(2) A total loss may be either an actual total loss, or a constructive total loss. 

(3) Unless a different intention appears from the terms of the policy, an 
insurance against total loss includes a constructive, as well as an actual, 
total loss. 

(4) Where the assured brings an action for a total loss and the evidence 
proves only a partial loss, he may, unless the policy otherwise provides, re- 
cover for a partial loss. 



402 MARINE INSURANCE 

(5) Where goods reach their destination in specie, but by reason of oblit- 
eration of marks, or otherwise, they are incapable of identification, the loss, 
if any, is partial, and not total. 
Actual Total Loss. 

57. (1) Where the subject-matter insured is destroyed, or so damaged 
as to cease to be a thing of the kind insured, or where the assured is irretriev- 
ably deprived thereof, there is an actual total loss. 

(2) In the case of an actual total loss no notice of abandonment need be 
given. 
Missing Ship. 

68. Where the ship concerned in the adventure is missing, and after the 
lapse of a reasonable time no news of her has been received, an actual total 
loss may be presumed. 

Effect of Transhipment, &c. 

69. Where, by a peril insured against, the voyage is interrupted at an 
intermediate port or place, imder such circimistances as, apart from any 
special stipulation in the contract of affreightment, to justify the master in 
landing and re-shipping the goods or other movables, or in transhipping 
them, and sending them on to their destination, the liability of the insurer 
continues notwithstandmg the landing or transhipment. 

Constructive Total Loss Defined. 

60. (1) Subject to any express provision in the policy, there is a con- 
structive total loss where the subject-matter insured is reasonably abandoned 
on account of its actual total loss appearing to be unavoidable, or because 
it could not be preserved from actual total loss without an expenditure 
which would exceed its value when the expenditure had been incurred. 

(2) In particular, there is a constructive total loss — 

(i) Where the assured is deprived of the possession of his ship or 
goods by a peril insured against, and (a) it is unlikely that he can 
recover the ship or goods, as the case may be, or (6) the cost of 
recovering the ship or goods, as the case may be, would exceed 
their value when recovered; or 
(ii) In the case of damage to a ship, where she is so damaged by a 
peril insured against that the cost of repairing the damage would 
exceed the value of the ship when repaired. 

In estimating the cost of repairs, no deduction is to be made in 
respect of general average contributions to those repairs payable 
by other interests, but account is to be taken of the expense of 
future salvage operations and of any future general average con- 
tributions to which the ship would be hable if repaired; or 
(iii) In the case of damage to goods, where the cost of repairing the 
damage and forwarding the goods to their destination would 
exceed their value on arrival. 
Effect of Constructive Total Loss. 

61. Where there is a constructive total loss the assured may either treat 
the loss as a partial loss, or abandon the subject-matter insured to the in- 
surer and treat the loss as if it were an actual total loss. 



APPENDIX 403 

Notice of Abandonment. 

62. (1) Subject to the provisions of this section, where the assured elects 
to abandon the subject-matter insured to the insurer, he must give notice 
of abandonment. If he fails to do so the loss can only be treated as a partial 
loss. 

(2) Notice of abandonment may be given in writing, or by word of mouth, 
or partly in writing and partly by word of mouth, and may be given in 
any terms which indicate the intention of the assured to abandon his insured 
interest in the subject-matter insured unconditionally to the insurer. 

(3) Notice of abandonment must be given with reasonable diligence after 
the receipt of reliable information of the loss, but where the information is 
of a doubtful character the assured is entitled to a reasonable time to make 
inquiry. 

(4) Where notice of abandonment is properly given, the rights of the 
assured are not prejudiced by the fact that the insurer refuses to accept 
the abandonment. 

(5) The acceptance of an abandonment may be either express or implied 
from the conduct of the insurer. The mere silence of the insurer after 
notice is not an acceptance. 

(6) Where notice of abandonment is accepted the abandonment is irre- 
vocable. The acceptance of the notice conclusively admits liability for the 
loss and the sufficiency of the notice. 

(7) Notice of abandonment is unnecessary where, at the time when the 
assured receives information of the loss, there would be no possibility of 
benefit to the insurer if notice were given to him. 

.. (8) Notice of abandonment may be waived by the insurer. 
(9) Where an insurer has re-insured his risk, no notice of abandonment 
need be given by him. 
Effect of Abandonment. 

63. (1) Where there is a valid abandonment the insurer is entitled to 
take over the interest of the assured in whatever may remain of the subject- 
matter insured, and all proprietary rights incidental thereto. 

(2) Upon the abandonment of a ship, the insurer thereof is entitled to any 
freight in course of being earned, and which is earned by her subsequent to 
the casualty causing the loss, less the expenses of earning it incurred after 
the casualty; and, where the ship is carrying the owner's goods, the insurer 
is entitled to a reasonable remimeration for the carriage of them subsequent 
to the casualty causing the loss. 

Partial Losses {including Salvage and General Average and 

Particular Charges) 
Particular Average Loss. 

64. (1) A particular average loss is a partial loss of the subject-matter 
insured, caused by a peril insured against, and which is not a general average 
loss. 

(2) Expenses incurred by or on behalf of the assured for the safety or 
preservation of the subject matter insured, other than general average and 



404 MARINE INSURANCE 

salvage charges, are called particular charges. Particular charges are not 
included in particular average. 
Salvage Charges. 

66. (1) Subject to any express provision in the policy, salvage charges 
incurred in preventing a loss by perils insured against may be recovered as 
a loss by those perils. 

(2) '' Salvage charges'' means the charges recoverable under maritime 
law by a salvor independently of contract. They do not include the ex- 
penses of services in the nature of salvage rendered by the assured or his 
agents, or any person employed for hire by them, for the purpose of averting 
a peril insured against. Such expenses, where properly incurred, may be 
recovered as particular charges or as a general average loss, according to 
the circumstances under which they were incurred. 
General Average Loss. 

66. (1) A general average loss is a loss caused by or directly consequen- 
tial on a general average act. It includes a general average expenditure as 
well as a general average sacrifice. 

(2) There is a general average act where any extraordinary sacrifice or 
expenditure is volimtarily and reasonably made or incurred in time of peril 
for the purpose of preserving the property imperilled in the common 
adventure. 

(3) Where there is a general average loss, the party on whom it falls is 
entitled, subject to the conditions imposed by maritime law, to a rateable 
contribution from the other parties interested, and such contribution is 
called a general average contribution. 

(4) Subject to any express provision in the policy, where the assured has 
incurred a general average expenditure, he may recover from the insurer 
in respect of the proportion of the loss which falls upon him ; and, in the case 
of a general average sacrifice, he may recover from the insurer in respect 
of the whole loss without having enforced his right of contribution from the 
other parties liable to contribute. 

(5) Subject to any express provision in the policy, where the assured has 
paid, or is liable to pay, a general average contribution in respect of the 
subject insured, he may recover therefor from the insurer. 

(6) In the absence of express stipulation, the insurer is not liable for any 
general average loss or contribution where the loss was not incurred for the 
purpose of avoiding, or in connexion with the avoidance of, a peril insured 
against. 

(7) Where ship, freight, and cargo, or any two of those interests, are owned 
by the same assured, the liability of the insurer in respect of general average 
losses or contributions is to be determined as if those subjects were owned 
by different persons. 

Measure of Indemnity 

Extent of Liability of Insurer for Loss. 

67. (1) The sum which the assured can recover in respect of a loss on a 
poHcy by which he is insured, in the case of an unvalued policy to the full 



APPENDIX 406 

extent of the insurable value, or, in the case of a valued policy to the 
full extent of the value fixed by the policy, is called the measure of 
indemnity. 

(2) Where there is a loss recoverable under the policy, the insurer, or 
each insurer if there be more than one, is liable for such proportion of the 
measure of indemnity as the amount of his subscription bears to the value 
fixed by the policy in the case of a valued policy, or to the insurable value 
in the case of an unvalued policy. 
Total Loss. 

68. Subject to the provisions of this Act and to any express provision in 
the policy, where there is a total loss of the subject-matter insured, — 

(1) If the policy be a valued policy, the measure of indemnity is the sum 
fixed by the policy: 

(2) If the policy be an unvalued policy, the measure of indemnity is the 
insurable value of the subject-matter insured. 

Partial Loss of Ship. 

69. Where a ship is damaged, but is not totally lost, the measure of in- 
demnity, subject to any express provision in the policy, is as follows: — 

(1) Where the ship has been repaired, the assured is entitled to the reason- 
able cost of the repairs, less the customary deductions, but not ex- 
ceeding the sum insured in respect of any one casualty: 

(2) Where the ship has been only partially repaired, the assured is entitled 
to the reasonable cost of such repairs, computed as above, and also to 
be indemnified for the reasonable depreciation, if any, arising from 
the unrepaired damage, provided that the aggregate amount shall not 
exceed the cost of repairing the whole damage, computed as above : 

(3) Where the ship has not been repaired, and has not been sold in her 
damaged state during the risk, the assured is entitled to be indemnified 
for the reasonable depreciation arising from the unrepaired damage, 
but not exceeding the reasonable cost of repairing such damage, com- 
puted as above. 

Partial Loss of Freight. 

70. Subject to any express provision in the policy, where there is a partial 
loss of freight, the measure of indemnity is such proportion of the sum fixed 
by the policy in the case of a valued policy, or of the insurable value in the 
case of an imvalued policy, as the proportion of freight lost by the assured 
bears to the whole freight at the risk of the assured under the policy. 
Partial Loss of Goods, Merchandise, &c. 

71. Where there is a partial loss of goods, merchandise, or other movables, 
the measure of indemnity, subject to any express provision in the policy, 
is as follows: — 

(1) Where part of the goods, merchandise or other movables insured by 
a valued policy is totally lost, the measure of indemnity is such pro- 
portion of the sum fixed by the policy as the insurable value of the 
part lost bears to the insurable value of the whole, ascertained as in 
the case of an unvalued policy: 

(2) Where part of the goods, merchandise, or other movables insured 



406 MARINE INSURANCE 

by an unvalued policy is totally lost, the measure of indemnity is the 
insurable value of the part lost, ascertained as in case of total loss: 

(3) Where the whole or any part of the goods or merchandise insured has 
been delivered damaged at its destination, the measure of indemnity 
is such proportion of the sum fixed by the policy in the case of a valued 
policy, or of the insurable value in the case of an unvalued policy, as 
the difference between the gross sound and damaged values at the 
place of arrival bears to the gross sound value: 

(4) "Gross value" means the wholesale price or, if there be no such price, 
the estimated value, with, 'in either case, freight, landing charges, 
and duty paid beforehand; provided that, in the case of goods or 
merchandise customarily sold in bond, the bonded price is deemed 
to be the gross value. ** Gross proceeds" means the actual price ob- 
tained at a sale where all charges on sale are paid by the sellers. 

Apportionment of Valuation. 

72. (1) Where different species of property are insured under a single 
valuation, the valuation must be apportioned over the different species in 
proportion to their respective insurable values, as in the case of an unvalued 
policy. The insured value of any part of a species is such proportion of 
the total insured value of the same as the insurable value of the part bears 
to the insurable value of the whole, ascertained in both cases as provided 
by this Act. 

(2) Where a valuation has to be apportioned, and particulars of the prime 
cost of each separate species, quality, or description of goods cannot be 
ascertained, the division of the valuation may be made over the net arrived 
sound values of the different species, qualities, or descriptions of goods. 
General Average Contributions and Salvage Charges. 

73. (1) Subject to any express provision in the policy, where the assured 
has paid, or is liable for, any general average contribution, the measure of 
indemnity is the full amoimt of such contribution, if the subject-matter 
liable to contribution is insured for its full contributory valu^; but, if such 
subject-matter be not insured for its full contributory vajue, or if only part 
of it be insured, the indemnity payable by the insurer must be reduced in 
proportion to the under insurance, and where there has been a particular 
average loss which constitutes a deduction from the contributory value, 
and for which the insurer is liable, that amount must be deducted from the 
insured value in order to ascertain what the insurer is liable to contribute. 

(2) Where the insurer is liable for salvage charges the extent of his liability 
must be determined on the like principle. 
Liabilities to Third Parties. 

74. Where the assured has effected an insurance in express terms against 
any liabiUty to a third party, the measure of indemnity, subject to any 
express provision in the policy, is the amoxmt paid or payable by him to 
such third party in respect of such liability. 

General Provisions as to Measure of Indemnity. 

76. (1) Where there has been a loss in respect of any subject-matter 
not expressly provided for in the foregoing provisions of this Act, the measure 



APPENDIX 407 

of indemmty shall be ascertained, as nearly as may be, in accordance with 
those provisions, in so far as applicable to the particular case. 

(2) Nothing in the provisions of this Act relating to the measure of in- 
demnity shall affect the rules relating to double insurance, or prohibit the 
insurer from disproving interest wholly or in part, or from showing that at 
the time of the loss the whole or any part of the subject-matter insured 
was not at risk under the policy. 
Particular Average Warranties. 

76. (1) Where the subject-matter insured is warranted free from par- 
ticular average, the assured cannot recover for a loss of part, other than a 
loss incurred by a general average sacrifice, imless the contract contained 
in the policy be apportionable; but, if the contract be apportionable, the 
assured may recover for a total loss of any apportionable part. 

(2) Where the subject-matter insured is warranted free from particular 
average, either wholly or under a certain percentage, the insurer is neverthe- 
less liable for salvage charges, and for particular charges and other expenses 
properly incurred pursuant to the provisions of the suing and labouring 
clause in order to avert a loss insured against. 

(3) Unless the poUcy otherwise provides, where the subject-matter in- 
sured is warranted free from particular average under a specified percentage, 
a general average loss cannot be added to a particular average loss to make 
up the specified percentage. 

(4) For the purpose of ascertaining whether the specified percentage has 
been reached, regard shall be had only to the actual loss suffered by the 
subject-matter insured. Particular charges and the expenses of and inci- 
dental to ascertaining and proving the loss must be excluded. 
Successive Losses. 

77. (1) Unless the policy otherwise provides, and subject to the provi- 
sions of this Act, the insurer is liable for successive losses, even though the 
total amount of such losses may exceed the sum insured. 

(2) Where, under the same policy, a partial loss, which has not been re- 
paired or otherwise made good, is followed by a total loss, the assured can 
only recover in respect of the total loss: 

Provided that nothing in this section shall affect the liability of the in- 
surer under the suing and labouring clause. 
Suing and Labouring Clause. 

78. (1) Where the poUcy contains a suing and labouring clause, the 
engagement thereby entered into is deemed to be supplementary to the 
contract of insurance, and the assured may recover from the insurer any 
expenses properly incurred pursuant to the clause, notwithstanding that 
the insurer may have paid for a total loss, or that the subject-matter may 
have been warranted free from particular average, either wholly or under 
a certain percentage. 

(2) General average losses and contributions and salvage charges, as 
defined by this Act, are not recoverable under the suing and labouring 
clause. 

(3) Expenses incurred for the purpose of averting or diminishing any loss 



408 MARINE INSURANCE 

not covered by the policy are not recoverable under the suing and labouring 
clause. 

Rights of Insurer on Payment 

Right of Subrogation. 

79. (1) Where the insurer pays for a total loss, either of the whole, or 
in the case of goods of any apportionable part, of the subject-matter insured, 
he thereupon becomes entitled to take over the interest of the assured in 
whatever may remain of the subject-matter so paid for, and he is thereby 
subrogated to all the rights and remedies of the assured in and in respect 
of that subject-matter as from the time of the casualty causing the loss. 

(2) Subject to the foregoing provisions, where the insurer pays for a 
partial loss, he acquires no title to the subject-matter insured, or such part 
of it as may remain, but he is thereupon subrogated to all rights and reme- 
dies of the assured in and in respect of the subject-matter insured as from 
the time of the casualty causing the loss, in so far as the assured has been 
indemnified, according to this Act, by such payment for the loss. 
Right of Contribution. 

80. (1) 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. 

(2) 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 propor- 
tion of the debt. 
Effect of Under Insurance. 

81. 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. 

Return of Premium 

Enforcement of Return. 

82. Where the premium, or a proportionate part thereof is, by this Act 
declared to be returnable, — 

(a) If already paid, it may be recovered by the assured from the insurer; 

and 
(6) If unpaid, it may be retained by the assured or his agent. 
Return by Agreement. 

83. Where the poUcy contains a stipulation for the return of the premium, 
or a proportionate part thereof, on the happening of a certain event, and 
that event happens, the premium, or, as the case may be, the proportionate 
part thereof, is thereupon returnable to the assured. 

Return for Failure of Consideration. 

84. (1) Where the consideration for the payment of the premium totally 
fails, and there has been no fraud or illegality on the part of the assured of 
his agents, the premium is thereupon returnable to the assured. 



APPENDIX 409 

(2) Where the consideration for the payment of the premium is apportion- 
able and there is a total failure of any apportionable part of the considera- 
tion, a proportionate part of the premium is, under the like conditions, there- 
upon returnable to the assured. 

(3) In particular — 

(o) Where the policy is void, or is avoided by the insurer as from the 
commencement of the risk, the premium is returnable, provided 
that there has been no fraud or illegality on the part of the 
assured ; but if the risk is not apportionable, and has once attached, 
the premium is not returnable : 

(b) Where the subject-matter insured, or part thereof, has never been 
imperilled, the premium, or, as the case may be, a proportionate 
part thereof, is returnable : 

Provided that where the subject-matter has been insured "lost 
or not losf and has arrived in safety at the time when the con- 
tract is concluded, the premium is not returnable unless, at such 
time, the insurer knew of the safe arrival; 

(c) Where the assured has no insurable interest throughout the cur- 
rency of the risk, the premium is returnable, provided that this rule 
does not apply to a pohcy effected by way of gaming or wagering 

(d) Where the assured has a defeartible interest which is terminated 
during the currency of the risk, the premium is not returnable; 

(e) Where the assured has over-insured imder an unvalued policy, a 
proportionate part of the premium is returnable; 

if) Subject to the foregoing provisions, where the assured has over- 
insured by double insurance, a proportionate part of the several 
premiums is returnable: 

Provided that, if the policies are effected at different times, and 
any earher 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. 

Mutual Insurance 

Modification of Act in Case of Mutual Insurance. 

85. (1) Where two or more persons mutually agree to insure each other 
against marine losses there is said to be a mutual insurance. 

(2) The provisions of this Act relating to the premium do not apply to 
mutual insurance, but a guarantee, or such other arrangement as may be 
agreed upon, may be substituted for the premium. 

(3) The provisions of this Act, in so far as they may be modified by the 
agreement of the parties, may in the case of mutual insurance be modified 
by the terms of the policies issued by the association, or by the rules and 
regulations of the association. 

(4) Subject to the exceptions mentioned in this section, the provisions 
of this Act apply to a mutual insurance. 



410 MARINE INSURANCE 

Supplemental 
Ratification by Assured. 

86. Where a contract of marine insurance is in good faith effected by one 
person on behalf of another, the person on whose behalf it is effected may 
ratify the contract even after he is aware of a loss. 

Implied Obligations Varied by Agreement or Usage. 

87. (1) Where any right, duty, or liability would arise under a contract 
of marine insurance by implication of law, it may be negatived or varied 
by express agreement, or by usage, if the usage be such as to bind both 
parties to the contract. 

(2) The provisions of this section extend to any right, duty, or liability 
declared by this Act which may be lawfully modified by agreement. 
Reasonable Time, &c. a Question of Fact. 

88. Where by this Act any reference is made to reasonable time, reason- 
able premium, or reasonable diligence, the question what is reasonable is a 
question of fact. 

Slip as Evidence. 

89. Where there is a duly stamped policy, reference may be made, as 
heretofore, to the sHp or covering note, in any legal proceeding. 
Interpretation of Terms. 

90. In this Act, unless the context or subject-matter otherwise requires, — 
"Action" includes counter-claim and set off: 

"Freight" includes the profit derivable by a shipowner from the employ- 
ment of his ship to carry his own goods or movables, as well as freight 
payable by a third party, but does not include passage money: 

"Movables" means any movable tangible property, other than the 
ship, and includes money, valuable securities, and other documents: 

"Policy" means a marine policy. 
Savings. 

91. (1) Nothing in this Act, or in any repeal effected thereby, shall affect — 
(a) The provisions of the Stamp Act, 1891, or any enactment for the 

time being in force relating to the revenue ; 
(6) The provisions of the Companies Act, 1862, or any enactment 

amending or substituted for the same; 
(c) The provisions of any statute not expressly repealed by this Act. 
(2) The rules of the common law including the law merchant, save in so 
far as they are inconsistent with the express provisions of this Act, shall 
continue to apply to contracts of marine insurance. 
Repeals. 

92. The enactments mentioned in the Second Schedule to this Act are 
hereby repealed to the extent specified in that schedule. 
Commencement. 

93. This Act shall come into operation on the first day of January one 
thousand nine hundred and seven. 

Short Title. 

94. This Act may be cited as the Marine Insurance Act, 1906. 



APPENDIX 411 

SCHEDULES 



FIRST SCHEDULE 



Form of Policy 
O Be IT known that as well in 

o5 >% own name as for and in the name and names of all and every other person 
i^**g or persons to whom the same doth, may, or shall appertain, in part or in 

>J^ all doth make assurance and cause 

o 

p and them, and every of them, to be insured lost or not lost, at and from 

Upon any kind of goods and merchandises, and also upon the body, tackle, 

apparel, ordnance, munition, artillery, boat, and other furniture, of and in 

the good ship or vessel called the 

whereof is master under Grod, for this present voyage, 

or whosoever else shall go for master in the said ship, or by whatsoever other 

name or names the said ship, or the master thereof, is or shall be named or 

called; beginning the adventure upon the said goods and merchandises from 

the loading thereof aboard the said ship, 

upon the said ship, &c. 

and so shall continue and endure, during her abode there, upon the said 
ship, &c. And further, imtil the said ship, with all her ordnance, tackle, 
apparel, &c., and goods and merchandises whatsoever shall be arrived at 



upon the said ship, &c., xmtil she hath moored at anchor twenty-four hours 
in good safety; and upon the goods and merchandises, xmtil the same be 
there discharged and safely landed. And it shall be lawful for the said ship, 
&c., in this voyage, to proceed and sail to and touch and stay at any ports 
or places whatsoever 

without prejudice to this insurance. The said ship, &c., goods and mer- 
chandises, &c., for so much as concerns the assured by agreement between 
the assured and assurers in this poUcy, are and shall be valued at 

Touching the adventures and perils which we the assurers are contented 
to bear and do take upon us in this voyage: they are of the seas, men of 
war, fire, enemies, pirates, rovers, thieves, jettisons, letters of mart and 
countermart, surprisals, takings at sea, arrests, restraints, and detainments 
^ S of all kings, princes, and people, of what nation, condition, or quality soever, 
gjS barratry of the master and mariners, and of all other perils, losses, and 
o misfortunes, that have or shall come to the hurt, detriment, or damage of the 



9 



co^ said goods and merchandises, and ship, &c., or any part thereof. And in 
•3 case of any loss or misfortune it shall be lawful to the assured, their factors. 



412 MARINE INSURANCE 

servants and assigns, to sue, labour, and travel for, in and about the defence, 
safeguards, and recovery of the said goods and merchandises, and ship, &c., 
or any part thereof, without prejudice to this insurance; to the charges 
whereof we, the assurers, will contribute each one according to the rate and 
g JJ quantity of his sum herein assured. And it is especially declared and agreed 
'S S ^hat no acts of the insurer or insured in recovering, saving, or preserving the 
^ "3 property insured shall be considered as a waiver, or acceptance of abandon- 
ment. And it is agreed by us, the insurers, that this writing or policy of 
assurance shall be of as much force and effect as the surest writing or policy 
of assurance heretofore made in Lombard Street, or in the Royal Exchange, 
or elsewhere in London. And so we, the assurers, are contented, and do 
hereby promise and bind ourselves, each one for his own part, our heirs, ex- 
ecutors, and goods to the assured, their executors, administrators, and 
assigns, for the true performance of the premises, confessing ourselves paid 
the consideration due unto us for this assurance by the assured, at and after 
the rate of 

In Witness whereof we, the assurers, have subscribed our names and 
sums assured in London. 



s 



N,B, — Com, fish, salt, fruit, flour, and seed are warranted free from 
average, unless general, or the ship be stranded — sugar, tobacco, hemp, flax, 
hides and skins are warranted free from average, under five pounds percent. 



I and all other goods, also the ship and freight, are warranted free from average, 
£ under three pounds percent unless general, or the ship be stranded. 

Rules for ConairucUon of Policy 

The following are the rules referred to by this Act for the construction of a 
policy in the above or other like form, where the context does not otherwise 
require: — 
Lost or not Lost. 

1 Where the subject-matter is insured "lost or not lost," and the loss 
has occurred before the contract is concluded, the risk attaches unless, at 
such time the assured was aware of the loss, and the insurer was not. 
From. 

2. Where the subject-matter is insured "from" a particular place, the 
risk does not attach imtil the ship starts on the voyage insured. 

At and From. [Ship.] 

3. (a) Where a ship is insured "at and from" a particular place, and 
she is at that place in good safety when the contract is concluded, the risk 
attaches immediately. 

(h) If she be not at that place when the contract is concluded the risk 
attaches as soon as she arrives there in good safety, and, unless the policy 
otherwise provides, it is immaterial that she is covered by another policy 
for a specified time after arrival. 
[Freight.] 

(c) Where chartered freight is insured "at and from" a particular place, 
and the ship is at that place in good safety when the contract is concluded 



APPENDIX 413 

the risk attaches immediately. If she be not there when the contract is 
concluded, the risk attaches as soon as she arrives there in good safety. 

(d) Where freight, other than chartered freight, is payable without 
special conditions and is insured '^at and from" a particular place, the risk 
attaches pro rata as the goods or merchandise are shipped; provided that 
if there be cargo in readiness which belongs to the shipowner, or which 
some other person has contracted with him to ship, the risk' attaches as 
soon as the ship is ready to receive such cargo. 
From the Loading thereof. 

4. Where goods or other movables are insured "from the loading thereof," 
the risk does not attach until such goods or movables are actually on board, 
and the insurer is not liable for them while in transit from the shore to the ship. 
Safely Landed. 

5. Where the risk on goods or other movables continues until they are 
"safely landed," they must be landed in the customary manner and within 
a reasonable time after arrival at the port of discharge, and if they are not 
so landed the risk ceases. 

Touch and Stay. 

6. In the absence of any further license or usage, the liberty to touch 
and stay "at any port or place whatsoever" does not authorise the ship to 
depart from the course of her voyage from the port of departure to the port 
of destination. 

Perils of the Seas. 

7. The term "perils of the seas" refers only to fortuitous accidents or 
casualties of the seas. It does not include the oridnary action of the winds 
and waves. 

Pirates. 

8. The term "pirates" includes passengers who mutiny and rioters who 
attack the ship from the shore. 

Thieves. 

9. The term "thieves" does not cover clandestine theft or a theft com- 
mitted by any one of the ship's company, whether crew or passengers. 
Restraint of Princes. 

10. The term "arrests, &c., of kings, princes, and people" refers to 
political or executive acts, and does not include a loss caused by riot or 
by ordinary judicial process. 

Barratry. 

11. The term "barratry" includes every wrongful act wilfully com- 
mitted by the master or crew to the prejudice of the owner, or, as the case 
may be the charterer. 

All Other Perils. 

12. The term "all other perils" includes only perils similar in kind to the 
perils specifically mentioned in the policy. 

Average unless General. 

13. The term "average unless general" means a partial loss of the sub- 
ject-matter insured other than a general average loss, and does not include 
"particular charges." 

28 



414 



MARINE INSURANCE 



Stranded. 

14. Where the ship has stranded, the insurer is liable for the excepted 
losses, although the loss is not attributable to the stranding, provided that 
when the stranding takes place the risk has attached and, if the policy be 
on goods, that the damaged goods are on board. 

Ship. 

15. The term ''ship'' includes the hull, materials and outfit, stores and 
provisions for the officers and crew, and, in the case of vessels engaged in a 
special trade, the ordinary fittings requisite for the trade, and also, in the 
case of a steamship, the machinery, boilers, and coals and engine stores, if 
owned by the assured. 

Freight. 

16. The term "freight" includes the profit derivable by a shipowner 
from the employment of his ship to carry hiff own goods or movables, as 
well as freight payable by a third party, but does not include passage money. 
Goods. 

17. The term "goods" means goods in the nature of merchandise, and 
does not include personal effects or provisions and stores for use on board. 

In the absence of any usage to the contrary, deck cargo and living animals 
must be insured specifically, and not imder the general denomination of 
goods. 



SECOND SCHEDULE 



Enactments Repealed 



Session and 
Chapter 



Title or Short Title 



19 Geo. 2. c. 37. 



28 Geo. 3. c. 56. 



An Act to regulate insurance on ships 
belonging to the subjects of Great 
Britain, and on merchandises or 
effects laden thereon. 

An Act to repeal an Act made in the 
twenty-fifth year of the reign of his 
present Majesty, intituled "An Act 
for regulating Insurances on Ships, 
and on goods, merchandises, or 
effects,'' and for substituting other 
provisions for the like purpose in 
lieu thereof. 



31 & 32 Vict. The Policies of Marine Assurance 
c. 86. Act, 1868. 



Extent of Repeal 



The whole Act. 



The whole Act so 
far as it relates to 
marine insurance. 



The whole Act. 



APPENDIX F 

MARINE INSURANCE (GAMBLING POLICIES) 

A BILL TO PROHIBIT GAMBLING ON LOSS BY MARITIME PERILS 

(1909) 

Be it enacted by the King's most Excellent Majesty, by and with the 
advice and consent of the Lords Spiritual and Temporal, and Commons, in 
this present Parliament assembled, and by the authority of the same, as 
follows: — 

1. Prohibition of (rambling an Loss by Maritime Perils, — (1) If 

(a) Any person effects a contract of marine insurance without 
having any bon& fide interest, direct or indirect, either in the 
safe arrival of the ship in relation to which the contract is 
made or in the safety or preservation of the subject-matter 
insured, or a bond, fide expectation of such an interest; or 

(b) Any person in the employment of the owner of a ship, not being 
a part owner of the ship, effects a contract of marine insurance 
in relation to the ship, and the contract is made "interest or 
no interest," or "without further proof of interest than the 
policy itself, " or "without benefit of salvage to the insurer, " 
or subject to any other like term, 

the contract shall be deemed to be a contract by way of gambling 
on loss by maritime perils, and the person effecting it shall be 
guilty of an offence, and shall be liable, on sunmiary conviction, 
to imprisonment, with or without hard labour, for a term not ex- 
ceeding six months, or to a fine not exceeding one himdred pounds, 
and in either case to forfeit any money he may receive under the 
contract. 

(2) Any broker through whom, and any insurer with whom, any such 
contract is effected shall be guilty of an offence and liable on sum- 
mary conviction to the like penalties if he acted knowing that the 
contract was by way of gambling on loss by maritime perils within 
the meaning of this Act. 

(3) Proceedings under this Act, shall not be instituted without the 
consent of the Attomey-CJeneral. 

(4) Proceedings shall not be instituted under this Act against a person 
(other than a person in the employment of the owner of the ship 
in relation to which the contract was made) alleged to have effected 
a contract by way of gambling on loss by maritime perils until an 
opportunity has been afforded him of showing that the contract 

415 



416 MARINE INSURANCE 

was not such a contract as aforesaid, and any information given 
by that person for that purpose shall not be admissible in evidence 
against him in any prosecution under this Act. 

(5) If proceedings under this Act are taken against any person (other 
than a person in the employment of the owner of the ship in relation 
to which the contract was made) for effecting such a contract, and 
the contract was made ''interest or no interest'' or ''without 
further proof of interest than the policy itself," or "without benefit 
of salvage to the insurer" or subject to any other like term, the 
contract shall be deemed to be a contract by way of gambling on 
loss by maritime perils unless the contrary is proved. 

(6) Any person aggrieved by an order or decision of a court of summary 
jurisdiction under this Act, may appeal to quarter sessions. 

(7) For the purposes of this Act the expression "Owner" includes 
charterer. 

(8) Subsections (3) and (6) of this section shall not apply to Scotland. 

2. Short Tide.— This Act may be cited as the Marine Insurance (Gambling 
Policies) Act, 1909, and the Marine Insurance Act, 1906, and this Act may 
be cited together as the Marine Insurance Acts, 1906 and 1909. 



APPENDK G 
THE HARTER ACT 

ACT OF CONGRESS, APPROVED FEBRUARY 13, 1893 

An Act relating to navigation of vessels, bills of lading, and to certain 
obligations, duties, and rights in connection with the carriage of property. 

Be it enacted by the Senate and House of Representatives of the United 
States of America in Congress assembled, 

Section 1, That it shall not be lawful for the manager, agent, master 
or owner of any vessel transporting merchandise or property from or between 
ports of the United States and foreign ports to insert in any bill of lading 
or shipping document any clause, covenant, or agreement whereby it, he, 
or they shall be relieved from liability for loss or damage arising from negli- 
gence, fault, or failure in proper loading, stowage, custody, care, or proper 
delivery of any and all lawful merchandise or property committed to its 
or their charge. Any and all words or clauses of such import inserted in 
bills of lading or shipping receipts shall be null and void and of no effect. 

Section 2. That it shall not be lawful for any vessel transporting mer- 
chandise or property from or between ports of the United States of America 
and foreign ports, her owner, master, agent or manager to insert in any bill 
of lading or shipping document any covenant or agreement whereby the 
obligations of the owner or owners of said vessel to exercise due diligence, 
properly equip, man, provision, and outfit said vessel, and to make said 
vessel seaworthy and capable of performing her intended voyage, or whereby 
the obligations of the master, officers, agents, or servants to carefully handle 
and stow her cargo and to care for and properly deliver same, shall in any 
wise be lessened, weakened, or avoided. 

Section 3. That if the owner of any vessel transporting merchandise or 
property to or from any port in the United States of America shall exercise 
due diligence to make the said vessel in all respects seaworthy and properly 
manned, equipped, and supplied, neither the vessel, or owners, agents, or 
charterers shall become or be held responsible for damage or loss resulting 
from faults or errors in navigation or in the management of said vessel, nor 
shall the vessel, her owner or owners, charterers, agent, or master, be held 
liable for losses arising from dangers of the sea or other navigable waters, 
acts of God, or public enemies, or the inherent defect, quality, or vice of the 
thing carried, or from insufficiency of package, or seizure under legal process, 
or for loss resulting from any act or omission of the shipper or owner of the 
goods, his agent or representative, or from saving or attempting to save life 
or property at sea, or from any deviation in rendering such service. 

417 



418 MARINE INSURANCE 

Section 4. That it shall be the duty of the owner or owners, master, or 
agent of any vessel transporting merchandise or property from or between 
ports of the United States and foreign ports to issue to shippers of any law* 
ful merchandise a bill of lading, or shipping document, stating, among other 
things, the marks necessary for identification, number of packages, or quan- 
tity, stating whether it be carrier's or shipper's weight, and apparent order 
or condition of such merchandise or property delivered to and received by 
the owner, master, or agent of the vessel for transportation, and such docu- 
ment shall be prima facie evidence of the receipt of the merchandise therein 
described. 

Section 5. That for a violation of any of the provisions of this Act the 
agent, owner, or master of the vessel guilty of such violation, and who re- 
fuses to issue on demand the bill of lading herein provided for, shall be liable 
to a fine not exceeding two thousand dollars. The amount of the fine and 
costs for such violation shall be a lien upon the vessel, whose agent, owner, or 
master is guilty of such violation, and such vessel may be libeled therefor 
in any district court of the United States, within whose jurisdiction the ves- 
sel may be found. One-half of such penalty shall go to the party injured by 
such violation and the remainder to the Government of the United States. 

Section 6. That this Act shall not be held to modify or repeal sections 
forty-two hundred and eighty-one, forty-two hundred and eighty-two, and 
forty-two hundred and eighty-three of the Revised Statutes of the- United 
States, or any other statute defining the liability of vessels, their owniers, 
or representatives. 

Section 7. Sections one and four of this act shall not apply to the trans- 
portation of live animals. 

Section 8. That this Act shall take effect from and after the first day 
of July, eighteen hundred and ninety-three. 



APPENDIX H 
YORE-ANTWERP RULES OF 1890 

RULE L— JETTISON OF DECK CARGO 

No jettison of deck cargo shall be made good as general average. 
Every structure not built in with the frame of the vessel shall be con- 
sidered to be a part of the deck of a vessel. 

RULE IL— DAMAGE BY JETTISON AND SACRIFICE FOR THE COM- 
MON SAFETY 

Damage done to a ship and cargo, or either of them, by or in consequence 
of a sacrifice made for the common safety, and by water which goes down a 
ship's hatches opened or other opening made for the purpose of making a 
jettison for the common safety, shall be made good as general average. 

RULE m.— EXTINGUISHING FIRE ON SHIPBOARD 

Damc^e done to a ship and cargo, or either of them by water or otherwise, 
including damage by beaching or scuttling a burning ship, in extinguishing 
a fire on board the ship, shall be made good as general average; except that 
no compensation shall be made for damage to such portions of the ship and 
bulk cargo or to such separate packages of cargo, as have been on fire. 

RULE IV.— CUTTING AWAY WRECK 

Loss or damage caused by cutting away the wreck or remains of spars, or 
of other things which have previously been carried away by sea-peril, shall 
not be made good as general average. 

RULE v.— VOLUNTARY STRANDING 

When a ship is intentionally run on shore, and the circumstances are such 
that if that course were not adopted she would inevitably sink, or drive on 
shore or on rocks, no loss or damage caused to the ship, cargo and freight, 
or any of them, by such intentional running on shore shall be made good as 
general average. But in all other cases where a ship is intentionally run 
.on shore for the common safety, the consequent loss or damage shall be 
allowed as general average. 

RULE VI.— CARRYING PRESS OF SAIL.— DAMAGE TO OR LOSS OF 

SAILS 

Damage to or loss of sails and spars, or either of them, caused by forcing 
a ship off the ground, for the common safety, shall be made good as general 

419 



420 MARINE INSURANCE 

average; but where a ship is afloat, no loss or damage caused to the ship, 
cargo, and freight, or any of them, by carrying a press of sail, shall be made 
good as general average. 

RULE Vn.— DAMAGE TO ENGINES IN REFLOATING A SHIP 

Damage caused to machinery and boilers of a ship, which is ashore and 
in a position of peril, in endeavoring to refloat, shall be allowed in general 
average, when shown to have arisen from an actual intention to float the 
ship for the common safety at the risk of such damage. 

RULE Vm.— EXPENSES OF LIGHTENING A SHIP WHEN ASHORE, 

AND CONSEQUENT DAMAGE 

When a ship is ashore, and^ in order to float her, cargo, bimker coals, 
and ship's stores, or any of them are discharged, the extra cost of lightening, 
lighter hire, and reshipping (if incurred), and the loss or damage sustained 
thereby, shall be admitted as general average. 

RULE IX.— CARGO, SHIP'S MATEIOALS, AND STORES BURNT FOR 

FUEL 

Cargo, ship's materials, and stores, or any of them, necessarfly burnt for 
fuel for the common safety at a time of peril, shall be admitted as general 
average, when and only when an ample supply of fuel had been provided; 
but the estimated quantity of coal that would have been consumed, calcu- 
lated at the price current at the ship's last port of departure at the date of 
her leaving, shall be charged to the shipowner and credited to the general 
average. 

RULE X.— EXPENSES AT PORT OF REFUGE, ETC. 

(a) When a ship shall have entered a port or place of refuge, or shaU have 
returned to her port or place of loading, in consequence of accident, sacri- 
fice or other extraordinary circumstances, which render that necessary for 
the common safety, the expenses of entering such port or place shall be ad- 
mitted as general average; and when she shall have sailed thence with her 
original cargo, or a part of it, the corresponding expenses of leaving such port 
or place, consequent upon such entry or return, shall likewise be admitted 
as general expense. 

(&) The cost of discharging cargo from a ship, whether at a port or place 
of loading, call, or refuge, shall be admitted as general average, when the dis- 
charge was necessary for the common safety or to enable damage to the ship, 
caused by sacrifice or accident during the voyage, to be repaired, if the re- 
pairs were necessary for the safe prosecution of the voyage. 

(c) Whenever the cost of discharging cargo from a ship is admissible as 
general average, the cost of reloading and storing such cargo on board the 
said ship, together with all storage charges on such cargo, shall likewise be 
so admitted. But when the ship is condemned or does not proceed on her 



APPENDIX 421 

original voyage, no storage expenses incurred after the date of the ship's con- 
demnation or of the abandonment of the voyage shall be admitted as 
general average. 

(eO If a ship under average be in a port or place at which it is practicable 
to repair her, so as to enable her to carry on the whole cargo, and if, in order 
to save expenses, either she is towed thence to some other port or place of 
repair or to her destination, or the cargo or a portion of it is transhipped by 
another ship, or otherwise forwarded, then the extra cost of such towage, 
transhipment and forwarding, or any of them (up to the amount of the extra 
expense saved) shall be payable by the several parties to the adventure in 
proportion to the extraordinary expense saved. 

RULE XI.— WAGES AND MAINTENANCE OF CREW IN PORT OF 

REFUGE, ETC. 

When a ship shall have entered or been detained in any port or place under 
the circumstances, or for the purpose of the repairs mentioned in rule X, 
the wages payable to the Master, Ofl&cers, and Crew, together with the cost 
of maintenance of the same, during the extra period of detention in such 
port or place until the ship shall or should have been made ready to proceed 
on her voyage, shall be admitted as general average. But when the ship 
is condemned or does not proceed on her original voyage, the wages and 
maintenance of the Master, Officers, and Crew, incurred after the date of 
the ship's condemnation or of the abandonment of the voyage, shall not be 
admitted as general average. 

RULE Xn.— DAMAGE TO CARGO IN DISCHARGING, ETC. 

Damage done to or loss of cargo necessarily caused in the act of discharg- 
ing, storing, reloading, and storing, shall be made good as general average, 
when and only when the cost of those measures respectively is admitted as 
general average. 

RULE Xm.— DEDUCTIONS FROM COST OF REPAIRS 

In adjusting claims for general average, repairs to be allowed in general 
average shall be subject to the following deductions in respect of "new 
for old," viz.: 

In the case of iron or steel ships, from date of original register to the date 
of accident, — 

Up to 1 Year Old. (A.) 

All repairs to be allowed in full except painting or coating of bottom, 
from which one-third is to be deducted. 

Between 1 and 3 Years. (B.) 

One-third to be deducted off repairs to and renewal of woodwork of hull, 
masts and spars, furniture, upholstery, crockery, metal and glassware, also 
sails, rigging, ropes, sheets and hawsers (other than wire and chain) awnings, 
covers, and painting. 



422 MARINE INSURANCE 

One-sixth to be deducted off wire rigging, wire ropes and wire hawsersy 
chain cables and chains, donkey engines, steam winches and connections, 
steam cranes and connections; other repairs in full. 

Between 8 and 6 Years. (C.) 

Deductions as above under Clause B, except that one-sixth be deducted 
off ironwork of masts and spars, and machinery (inclusive of boilers and their 
mountings). 

Between 6 and 10 Years. (D.) 

Deductions as above under Clause C, except that one-third be deducted 
off ironwork, masts and spars, repairs to and renewal of all machinery (in- 
clusive of boilers and their mountings), and all hawsers, ropes, sheets and 
rigging. 

Between 10 and 15 Years. (£.) 

One-third to be deducted off all repairs and renewals, except ironwork 
of hull and cementing and chain cables, from which onensoxth to be deducted. 
Anchors to be allowed in fulL 

Over 16 Years. (F.) 

One-third to be deducted off all repairs and renewals. Anchors to be 
allowed in fulL One-sixth to be deducted off chain cables. 

Generally. (G.) 

The deductions (except as to provisions and stores, machinery and boilers) 
to be regulated by the age of the ship, and not the age of the particular 
part of her to which they apply. No painting bottom to be allowed if the 
bottom has not been painted within six months previous to the date of 
accident. No deduction to be made in respect of old material which is 
repaired without being replaced by new, and provisions and stores which 
have not been in use. 

In the case of wooden or composite ships: — 

When a ship is under one year old from date of original register, at the 
time of accident, no deduction new for old shall be made. 

After that period a deduction of one-third shall be made, with the follow- 
ing exceptions: — 

Anchors shall be allowed in full. Chain cables shall be subject to a de- 
duction of one-sixth only. 

No deduction shall be made in respect of provisions and stores which had 
not been in use. 

Metal sheathing shall be dealt with, by allowing in full the cost of a weight 
equal to the gross weight of metal sheathing stripped off, minus the proceeds 
of the old metal. Nails, felt, and labor metaling are subject to a deduction 
of one-third. 

In the case of ships generally: — 



APPENDIX 423 

In the case of all ships, the expense of straightening bent ironwork, 
including labor of taking out and replacing it, shall be allowed in full. 

Graving dock dues, including expenses of removals, cartages, use of shears, 
stages, and graving dock materials, shall be allowed in full. 

RULE XIV.— TEMPORARY REPAIRS 

No deductions ''new for old" shall be made from the cost of temporary 
repairs of damage allowable as general average. 

RULE XV.— LOSS OF FREIGHT 

Loss of freight arising from damage to or loss of cargo shall be made good 
as general average either when caused by a general average act or when 
the damage to or loss of cargo is so made good. 

RULE XVI.— AMOUNT TO BE MADE GOOD FOR CARGO LOST OR 

DAMAGED BT SACRIFICE 

The amount to be made good as general average for damage or loss of 
goods sacrificed shall be the loss which the owner of the goods has sustained 
thereby, based on the market values at the date of the arrival of the vessel 
or at the termii^Ation of the adventure. 

RULE XVn.— CONTRIBUTORY VALUES 

The contribution to a general average shall be made upon the actual values 
of the property at the termination of the adventure, to which shall be added 
the amount made good as general average for property sacrificed; deduc- 
tions being made from the shipowner's freight and passage money at risk 
of such port charges and crew's wages as would not have been incurred 
had the ship and cargo been totally lost at the date of the general average 
act or sacrifice, and have not been allowed as general average; deduction 
being also made from the value of the property of all charges incurred in 
respect thereof subsequently to the general average act, except such charges 
as are allowed in general average. 

Passengers' luggage and personal effects not shipped imder bill of lading 
shall not contribute to general average. 

RULE XVm.— ADJUSTMENT 

Except as provided in the foregoing rules, the adjustment shall be drawn 
up in accordance with the law and practice that would have governed the 
adjustment had the contract of affreightment not contained a clause to 
pay general average according to these rules. 



APPENDIX I 
AVERAGE BOND 

WHEREAS, the 

whereof waa maater 

having on board a cargo of 

sailed from 

on or about the day of 191 

bound for 

and in the course of her said voyage, it is alleged that 

AND WHEREAS, by reason of the occurrences of the voyage, certain losses and expenses 
have been incurred, and other further losses and expenses may yet be incurred, which may 
be a charge by way of General Average or otherwise upon the vessel, her freight, her cargo, 
or either of them; or which may be charges upon specific interests. 

NOW therefore, we the subscribers, owners, and/or charterers of si^^ vessel, owners of 
her freight, owners, shippers or consignees of her cargo, or agents of one or more of said 
parties having such interest as we have severally described and set opposite our respective 
signatures hereto, in consideration of the waiver of the rights of the owner and/or other 
party interested herein to take immediate action against hull and/Or freight and/or cargo 
for the enforcement of liens and/or General Average claims and/or other daims arising 
from this disaster not giving rise to liens do hereby for ourselves personally our respective 
successors, executors and administrators and for our principals their successors, executors 
and administrators, severally but not jointly or one for the other covenant and agree to and 
with 

and who are hereby appointed trustees for all concerned, that aU losses 

and expenses as aforesaid which shall be made to appear to be due from us or our principals 
or from any firm of which we are or were co-partners at the time any liability arose under 
the premises shall be paid unto the said 

and/or as trustees for all concerned, provided that such losses and ex- 
penses shall be state and apportioned by Average Adjusters, in accord- 
ance with the established usages and laws in similar cases; and that such payment shall be 
made upon the completion of the statement of such losses and expenses and after due notice 
has been given thereof. 

And we do further agree to furnish promptly to said adjusters upon their request all such 
information and all such documents as they may require from us to make the said adjust- 
ment. 

This bond may be executed in several parts of like tenor and date, the whole of which are 
to constitute but one bond with the same effect as if each of said parts were severally signed 
by us. 

In the event of the compensation for any services which have been or may hereafter be 
rendered in whole or in part to the cargo, whether of the nature of salvage or otherwise, 
being fixed by agreement or arbitration. We hereby agree to pay our proportion of the sum 
thus fixed; and in the event of action being brought to recover for such services. We hereby 
agree to give bond for our proportion of the sum sued for, in the same manner as if the 
person or persons by whom suit is brousht, be they salvors or otherwise, had required such 

424 



APPENDIX 



425 



bond direct from ub, before surrendering the cargo; and We farther agree to pay and fully 
satisfy any final decree that may be rendered, according to our proportion thereof. 

IN WITNESS WHEREOF we have to these presents set our hands in the City of 

this day of in the year of our Lord 

one thousand nine hundred and 



SIGNATURES 



MARKS 
AND NOS. 



INTEREST 



AMT. OF I NAME OF 
INVOICE I UNDERWRITER 



426 MARINE INSURANCE 



APPENDK J 

General Average Guarantee 

Form op Underwriters Guarantee for the Payment op 
General Average, Salvage and Special Charges 



19 



In consideration of the delivery from the 
of the following goods, viz: 



Consigned to 



without the requirement of a deposit, we hereby guarantee the 
payment of all General Average, Salvage and/or Special Charges 
for which said goods are Uable. 



INDEX 



Abandonment, 166, 330-333 

Adjusters, 362 

general average, 301 

Age of discovery, 7 

A. H. U. A. forms 

1917 form, 236, 373 
auxiliary form, 245, 377 
builders risk form, 246, 380 

Aids to navigation, 31 

Airplanes, 279 

American Record, The, 83 
page of record, 84 

''And Arrival," meaning of, 231 

Annual statement, 366 

Anticipated freight, 261 

Application, 100 

relation to policy, 103 
standard form, 370-371 

Appraisers, 361 

Arbitrage, 294 

Arrests, 151 

"As their interest may appear," use 
of the expression, 120 

Assignment of policies, 106 
of hull policy, 238 
of Lake hull policy, 242 

Assured, the, 112 

At and from, 132, 134 

Auxiliary vessels, 61, 244 
form for insuring, 377 
future of, 246 

Average clauses, 161-162 

free of particular average, 194:- 

198 
in A. H. U. A. (1917 form), 238 
in cargo insurance, 194 
in connection with particular 

average, 319 
in hull insurance, 223-224 

Average, definition of, 2 



Ballast, vessels in, 80 
Barratry, 147 
Bill of exchange 

acceptance of, 58 

form, 57 

method of collection, 57 

origin of, 47 

trading in, 59 
BiU of lading, 48, 52, 53, 325 

freight, 257 
Binders, 100, 358 
Blanket policies, 123 
Blockade, 269 
Bordereaux, 295 
Bottled goods, 209 
Bottomry bonds 

earliest records, 2 

forms distinguished, 3 

Grecian exchange for placing 
bonds, 4 

insurable interest in, 115 

rate of interest, 3, 5 

sea codes in re bottomry, 5 
Breach of warranty, 180, 239 
Breakage, 215 
Brokers, 99, 342 

as underwriter, 349 

duty twofold, 346 

in England, 351 

services in general average, 
348 
Bruges, important port, 6 
Builders' risks, 246, 380 
Bulk cargo carriers, 66 
Bulkheads, 145 
Buoyancy, 70 

center of, 73 
Burlaps, 214 
Burning, 198 



427 



428 



INDEX 



CaJms, 38 

Cancellation of contracts, 105, 230 

Canned goods, 209 

Cargo insurance, 186 

attachment of risk, 132 

particular average on cargo, 
314 

risk after discharge, 133 

valuation, 138 
Carrier's liabiUty, 165, 340 
Carthaginians, 4 
Certificate of enrollment, 326 
Certificate of insurance, 48, 54 

countersignature of, 104 

form of certificate, 55 

is quasi-negotiable, 56, 106 

payment of loss in foreign cities, 
56, 121 

proof of loss, 325 

transfer payment of loss, 121 
Charter money, 256 
Charter party, 51, 256 

bareboat form, 52 

standard forms, 52 
Chartered or as if chartered, 262 
C. I. F. (cost, insurance, freight), 49 
Civil War, 24 
Classification societies, 81 
Clipper ships, 23 
Club insurance, 229 
Coal cargoes, 213 
Codes 

Barcelona, Venice, Florence, 
Bilbao, 8 

laws of Wisby, 5 

Marine Insurance Act, 1906, 20 
Co-insurance, 164, 292 
Collectible freight, 258 
Collision, 198 

Uability, 227, 228 
Commerce, the exchange of prod- 
ucts, 44 
Commercial documents, 47 
Commercial geography, 44 

racial characteristics affect ma- 
rine insurance, 190 
Commissions G>rokers), 348 



Common carrier's insurance, 215. 

216 
Competition; effect on rates, 95, 157 
Composite vessels, 61, 63 
Concealments, 182 
Concrete vessels, 61, 67 
Constructive total loss, 327 

American and English practice 
differs, 329 
Contraband of war, 270, 271 
Contributory values hull, 239 

in general average, 305-307 
Corporation underwriting, 109 

efforts to break monopoly, 17 

first American company, 22 

first companies organized, 14 

in United States, 97 

monopoly repealed, 18 

new companies, 19 

the monopoly, 15 
Cost and freight sales, 49 

insurance and freight sales, 49 

sales, 48 
Cotton, insurance of, 204 
Crusaders, 5 
Currency insurance, 217 
Currents, 37 
C. & F. (cost and freight), 49 

Dairy products, 209 

Darkness, 39 

Dead freight, 259 

Dead weight capacity, 70 

Declaration of London, 269 

Deductible average clauses, 161 

in Lake hull insurance, 242 
Derelicts, 37 

Destruction of neutral prizes, 272 
Detainments, 152 
Deviation, 135, 136, 179 

excusable, 167 
Disbursements insurance, 237 
Displacement, 69 

curve, 69 
Double insurance, 163, 164 
Draft 

acceptance of, 58 



INDEX 



429 



Draft, form, 57 

method of collection, 57 

origin of, 47 

trading in, 59 
Dressed meats, 210 
Duty insurance, 263 

Eggs, 209 

Elements of a contract, 96 

Enemies, 150 

Engine, the marine, 64 

types of, 68 
Explosion risk, 277 
Expressed warranties, 180, 181 
Extension into port, 133, 231 
Extrinsic evidence in construing of 
contract, 103 

F. A. S. free alongside, 48 
F. I. A. insurance, 236 
Fire, 145, 203, 214, 309 

protection, 145 
Floating policies, 122-124 

in reinsurance, 285 
F. O. B., free on board, 48 
Fog, 38 

Fortuitous losses, 93 
Franchise, 161 

efifect in case of loss, 319 
Fraud, &-143 

in England, 18 

in West Indies, 23 

voids policy, 182, 185 
Free-board, 71 

Free of British capture clause, 275 
Free of capture and seizure clause, 

153 
Free of particular average, 194 

F. P. A. A. C. and F. P. A. E. C, 
195-198 
Freight contingency, 258 
Freight insurance, 251 

delivery of cargo in specie, 257 

future freights, 260 

in general average, 311 

pro-rata itineris peracti, 253 

when is freight earned, 252 

29 



Frozen meats, 210 

Fruits, 208 

Full cargoes, 187, 201, 202 

General average, 299 

adjusters, 301 

adjustment, 305 

bond, 302, 424 

definition, 301 

distinguished from particular 
average, 2 

earliest records, 2 

elements necessary for, 302 

guarantee, 302, 426 

in hull insurance, 231 

introduced into policy, 172 

York-Antwerp rules, 308, 419 
General cargoes, 187 
Genoese, 5 
Geography, physical, 29 

commercial, 44 
Good faith, 96, 98 
Grain cargoes, 206, 207 
Gravity, center of, 73 
Greeks, 4 

Guaranteed freight, 254 
Giudon de la Mer, 9 

Hanseatic League, 5 

banished from England, 11 
controlled commerce, 6-9 
practised marine insurance, 10 
the steelyard, 10 

Harbors, 39 

types of, 40 

Harter act, 143 
text of act, 417 

Hemp, 207 

Hides and skins, 211 

Hull insurance, 219 

attachment of risk, 133, 134 
auxiliary vessels, 244, 377 
buUders' risks, 246, 380 
Lake vessels, 240, 382 
metal vessels, 235, 373 
particular average on hull, 320 
single vessels and fleets, 219, 220 



430 



INDEX 



Hull, valuation, 139, 221, 322 

wooden vessels, 243 
Hurricanes, 33 

Ice, 38 

Illicit trade, 165 
Implied warranties, 173 
Inchmaree clause, 226 
Individual underwriters 

business grows, 15, 16 

in England, 13 

in United States, 21, 97 
Inquiry, meaning of, 100 
Institute trading warranties, 223 
Insurable interest, 97, 112 

extent of, 113 

in freight, 259 

must be definite, 117 

must exist, 117 

who has insurable interest, 114 
Insurance, marine 

early records, 6 

first use of word, 7 

in England, 9 

in United States, 22, 24, 25 

origin, 1 
Internal combustion engines, 68, 244 
International law, 267, 273 
Invoice, 48, 325 

determines relation between 
buyer and seller, 50 

vis6 of consul, 51 
Iron vessels, 61, 64 
Isherwood system, 65 

Jettison, 1, 146, 309 
Jumbo lines, 282 
Jute, 207 

Lake time clauses, 240, 382 
vessels, 67 

Law of averages, 95 

Law of marine insurance 

early codes and decisions, 19 
first English statute, 12 
in New York State, 118 
law of the place in construing 
of contracts, 104 



Law of marine insurance. Lord 
Mansfield, 20 

Marine Insurance Act, 1906, 
20, 387 

proposed New York code, 27 
Laws of Wisby, 5 
Lay-up return premiums, 230, 242 
Leakage, 215 

Legal conduct, implied warranty of, 
174 

expenses in collision cases, 228 
Letters of credit, 59 

of mart and countermart, 151 
Liability of carrier, 143 

determined by bill of lading, 53 
Licenses in time of war, 276 
Limitation of UabiUty, 122, 284, 287 
Liners, 51, 64 

Livestock insurance, 128, 210 
Lloyd's coffee house, 13 
Lloyd's List 

control taken by Lloyd's, 16 

publication commenced, 14 
Lloyd's London, organized, 15 
Lloyd's News, originated, 13 
Lloyd's Register, 82 
Load lines, 71 

advantages of law, 72 
Loan receipts, 341 
Lombard street, 11 
Lombards 

controlled commerce, 6, 9 

in England, 10 

leave England, 11 
Longitudinal framing, 65 
Lost or not lost, 125 
Losses 

adjustment of loss, 160, 298 

doubtful losses, 276, 338 

fortuitous losses, 93 

general average, 299 

general discussion, 297 

not covered by policy, 142, 143 

particular average, 313 

proofs and payment of, 159, 
160, 325 

salvage losses, 318 



INDEX 



431 



Losses, total loss of part, 313 

total and constructive total loss, 

327 
war losses, 336 

Machinery insurance as cargo, 214 

as huU, 226 
Manifest, 54 

Marine engines, 64, 68, 244 
Marine Insurance, definition, 93 

purpose of, 95 
Marine Insurance Act, 1906, history 
of act, 20 

text of act, 387 
Marine Insurance (Gambling Poli- 
cies) Act (1909), 21 
text act of, 415 
Master of vessel, 129 
Measurement of ships, 89 

for cargo capacity, 90 
Memorandum clause, 168, 171 
Men-of-war, 150, 277 
Mercantile customs in construing 

policies, 102 
Merchant marine, the clipper ship, 
23 

decline, 25 

revival, 27 
Meta-center, 75 
Meta-center height, 75 
Metal vessels, 61 

insurance of, 235, 373 
Misrepresentations, 182 
Missing vessels, 336 
Monopoly, the, 15 

efforts to break monopoly, 17 

monopoly repealed, 18 
Monsoons, 33 
Moral hazard, 88, 91 

in hull insurance, 220 
Mutual companies, 352 

Nationality, 87 
Natural forces, 32 

effect on cargo insurance, 192 
Negligence, 94, 143 



Ocean, the, 31, 32 
Office organization, 356 
On board or not on board, 261 
On deck cargo, 127 

unsafe deckloads, 8 
Open policies, 122, 124 

in reinsurance, 285 
Ore cargoes, 213 

Parcel post insurance, 217 
Particular average, 313 

distinguished from general aver- 
age, 3 

method of adjustment, 314 

on cargo, 314 

on freight and duty, 317, 323 

on hull, 320 

on profits and commissions, 320 
Particular charges, 314 
Payee of loss, 120 

loss orders, 122 
Perils of the sea, 143, 144 
Permanent covers in England, 124 
Phcenicians, 4 
Physical geography, 29 

methods of shipment controlled 
by physical enviroment, 
189 
Pilferage, 94, 148 
Pirates, 148, 149 
PlimsoU mark, 72 
Policy forms 

basic form necessary, 186 

British form of policy, 109, 411 

for hull insurance, 234 

no standard forms in United 
States, 109 

standard Lloyd's policy of 1779, 
16 

types of poHcies, 108 
Policy of insurance, 54, 101, 411 

assignment of, 106 

attachment of, 116, 129, 130, 
132-134 

effect of printed, written and 
stamped words, 102 

form of certificate, 55