What is Ocean Marine Insurance?

Did you know that the insurance industry actually began in the ocean? The modern day insurance industry—the home, auto, commercial, property, and liability coverages we come across so often in everyday life—are all the offsprings of maritime insurance. In some form or another, maritime insurance has existed since 3000 B.C. in China, though modern day ocean marine policies didn’t arrive on the scene until the famed Lloyd’s of London issued them in 1688. The merchants of that era wanted to protect themselves from the heavy losses they could face from shipping—a very dangerous venture at the time, especially since ships were built from wood.

Ever since then, Ocean Marine Insurance has provided coverage to vessel owners during marine transport domestically or abroad for losses related to cargo, liability, and the physical damage of ships.

Why do you need Ocean Marine Insurance?

Sailing the high seas may not be as dangerous as it once was, but there are still an array of unique risks and challenges for any vessel venturing into the waters. The regular news of hurricanes relentlessly battering the East Coast and Gulf Coast reminds us that dangerous weather events like hurricanes can cut a violent swath through the oceans. Ships—and the valuable cargo on board—can be sunk or damaged by stormy weather, accidents, collisions, machinery failure, fires, piracy, or human error. Here are just a few statistics that illuminate the significant exposure to risk for ships and their cargo:

• Between 2000 and 2014, there were over 100 adverse weather events on the seas resulting in billions of dollars worth of losses.¹
• Ocean cargo losses have exceeded $2.4 billion annually from 2007 to 2014.²
• 10,000 shipping containers fall into the ocean every year.³
• Human error accounts for about 75% to 90% of marine accidents and cost the insurance industry more than $1.6 billion in 2017.⁴
• Machinery breakdown (including engine failure) ranks among the largest causes of marine losses by value.⁵
• Fire/explosion comprised 13 percent of marine claims in 2017.⁶

Shipping can be an extremely complex endeavor with many moving parts. Ocean vessels and the cargo on board are exposed to numerous risks that could result in devastating losses. There are myriad scenarios that could pose a threat to ships on the oceans, including the following:

Example:

• A container ship carrying millions of dollars worth of retail goods on the transatlantic route from Asia to North America runs headfirst into hurricane-force winds. Amidst 30-ft waves and 60-mph winds, dozens of containers fall overboard and are lost to the sea. The vessel owner must file an insurance claim for hundreds of thousands of dollars worth of cargo losses.

Example:

• A luxury yacht sailing off the coast of Mombasa, Kenya is hijacked by pirates armed with assault rifles. The company that owns the ship must pay a $2 million ransom to free the ship, but fortunately, piracy is covered under their Ocean Marine Insurance policy.

Example:

• A passenger ferry in Scotland hits two pontoon boats and runs aground after the vessel faces an engine problem. The ferry is damaged severely; nine passengers suffer injuries.

Example:

• A cruise ship is sailing on the Caribbean when an outbreak of Norovirus causes 200 passengers to fall ill. Many of the passengers sue the cruise line for medical expenses; Ocean Marine Insurance covers the liability for the ship.

What are the main Ocean Marine Insurance coverages?

Ocean Marine Insurance has expanded over time to offer financial protection to owners of vessels from a variety of different losses. The major types of vessels that qualify for coverage include:

• Container Ships
• Yachts
• Barges
• Fishing boats
• Ferries
• Tugboats
• Tankers
• Sailing Charters
• Oceanic Research Vessels

Today, Ocean Marine Insurance is an umbrella term for three separate coverages that address the main sources of loss for vessel owners: hull coverage, cargo coverage, and liability coverage.

What is Ocean Marine Hull Coverage?

Hull Coverage, sometimes called Hull and Machinery Insurance (H&M), provides coverage for physical damage to the vessel and its operating machinery and equipment. The hull refers to the main body of the ship. Hull Coverage is purchased by the shipowner or main party that is responsible for the ship’s physical well-being. In addition to ships and boats, Hull Coverage can also benefit other types of floating equipment and even fixed properties such as offshore oil rigs.

Insurance companies will determine the specific perils that Hull Insurance will cover, but typical categories are the following:

• Accidents
• Collisions
• Fire/Explosion
• Grounding
• Tidal waves

Example:

• An explosion in the engine of an oil tanker causes a fire that spreads throughout the ship, damaging the entire body of the ship beyond repair. For this total loss, Ocean Marine Hull Coverage pays out the policy limit.

Under a “running down” clause, Hull Coverage also offers shipowners liability coverage should the vessel enter into a collision with another vessel on the water. If the insured is liable for a collision that causes property damage or property loss to the other vessel, then the “running down” clause of Hull Coverage will cover up to the full amount owed (within the policy limit).

What is Ocean Marine Cargo Coverage?

Ocean Marine Cargo Coverage protects against losses to cargo anytime it is in transit on the water. For many businesses, cargo shipments are literal moving targets of revenue, e.g. a large retailer transporting millions of dollars worth of consumer goods on a container ship just before the holiday shopping season. Lost or damaged cargo can significantly impact the company’s bottom line.

Ocean Marine Cargo Coverage covers cargo that has been physically damaged, while some insurance cargo policies also offer protections for theft and other forms of loss. Some policies insure against all risks (damage to cargo from external causes except a few exclusions); other policies name specific perils that are covered.

Example:

• A boutique retailer selling women’s apparel imports a shipment of clothes from a supplier in Vietnam. Unfortunately, a fire on board the container ship transporting the items causes irrevocable damage to the goods—worth an estimated $100,000. The retailer files a claim against their Ocean Marine Cargo Insurance policy and receives a $100,000 payout from the insurance company.

There are also different policies to purchase depending on how frequently your business might be making shipments:

Open cargo policies automatically cover all the shipments made by a company during the defined policy period. For businesses with regular shipments, this is a convenient coverage because the company would only have to notify the insurer when a new shipment will be departing.

Specific cargo policies insure cargo for a single voyage. This type of insurance makes sense for small businesses that make periodic shipments.

What is Ocean Marine Liability Coverage?

Ocean Marine Liability Coverage, also known as Protection and Indemnity (P&I) coverage, insures against a wide variety of liability risks associated with the ownership and operation of an ocean vessel, including:

Illness, injury, or death claims from crew and passengers

• Example: A breakout of measles on board a luxury cruise ship causes 15 crew members to fall ill. After the cruise ship docks at the port, the affected employees are rushed to the hospital and receive emergency treatment. The crew members file a lawsuit against the cruise line for medical expenses.

Liability claims as a result of collision

• Example: A riverboat collides with another riverboat on the Chicago River, causing significant damage to the other boat.

Cleanup and removal of wreckage

• Example: A yacht is completely wrecked when it is run aground during a storm. The owner of the yacht must hire workers to clean up the wreck and remove it from the water.

Damage to cargo by specific situations

• Example: A container ship collides with another container ship and damages the cargo aboard the other ship.

Damage to other objects by the vessel

• Example: A ship runs into the dock and causes damage to the dock.

Oil spill or pollution civil liabilities

• Example: An explosion on an oil tanker in the Gulf of Mexico expels millions of barrels of oil into the Gulf, causing significant damage to the coast. A group of citizens who own property along the coastline sues the oil tanker for the property damage it has caused.

Expenses resulting from quarantine

• Example: A cruise ship imposes a quarantine on 200 passengers who have been affected by a Norovirus outbreak on the ship.

War and political risks

• Example: Two U.S. oil tankers are attacked by an Iranian naval ship in the Gulf of Oman, amidst escalating tensions between the two countries.

What doesn’t Ocean Marine Liability Insurance cover?

• Liabilities covered under a Worker’s Compensation Policy
• Liabilities covered under the collision clause of a traditional Hull Coverage policy

For more information on this topic, please read our article on Protection and Indemnity coverage.

Final Word

Ocean vessels and the valuable cargo they transport are exposed to unique risks and liabilities. From the physical damage the ships may sustain to devastating losses of cargo to the dangers that crew members and passengers face on the waters, sailing is still a risky venture. Ocean Marine Insurance, including Hull Coverage, Cargo Coverage, and Liability Coverage, provide financial protection for shipowners facing a vast array of potential claims, lawsuits, and costly scenarios.

Sources
[1] National Oceanic and Atmospheric Administration
[2] International Union of Marine Insurance
[3] Logistics Management
[4,5,6] Allianz