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Marine insurance: Is it time that we all talk like a pirate?

Jo McIntosh, New Zealand Tree Grower November 2018.

‘Talk like a pirate’ day on 19 September was celebrated by many involved in the marine insurance world and an opportunity for people to dress up as pirates and raise money for charity. Marine insurance is often not given the focus which I think it should have. It is time we all ‘talk like pirates’ and give more thought to the perils of the sea and marine exposure and it is important to understand the terminology which can be crucial in managing your risk.

New Zealand is an export nation and many entities are involved in growing, producing and transporting a crop for export. For most exporters that means a maritime transit is required at some point.

Marine insurance is an interesting subject and this type of insurance is one of the oldest in the world, with a history dating back to early Greek, Roman and Asian merchants. During the 1700s, Lloyds emerged as a financial market from a group of merchants supporting each other’s ventures. Some merchants, no longer involved in direct trade themselves, specialised and underwrote the risks which owners face when sending their cargo and sailing ships over the horizon. Over many centuries the policy wording in the form of cargo clauses developed, as did formalised international commercial terms.

You may be aware of some of these international commercial terms or Incoterm as they are known. Incoterms are set out by the International Chamber of Commerce and are designed so that no matter where in the world you are based or what language you speak, when trading you understand when you are at risk for physical loss or damage of the cargo you are buying or selling. The Incoterm’s rules have become an essential part of the daily language of trade. They have been incorporated in contracts for the sale of goods worldwide and provide rules and guidance to importers, exporters, lawyers, transporters, insurers and others involved in international trade.

Free on board

As an example, from New Zealand, logs are often sold free on board with the acronym FOB being used a lot.

What does that mean? For free on board sales, the seller is responsible for getting the logs on board the vessel and to have cleared the logs for export. Once on board, the risk of loss or damage to the goods passes to the buyer who bears all costs from that moment onwards. The buyer is responsible for the goods and it is their responsibility to insure them or if they choose, to not insure them.

For many New Zealand exporters, FOB seems like an easy option. You have got the logs on board and the job is done. What can go wrong?

As happened with the Rena shipping disaster, sales using FOB can cause some unexpected dramas. Many exporters who had cargo on board the Rena had organised shipping through an agent and had no idea that their products were on board. It was not until they had calls from clients chasing up their goods that the penny dropped. The buyer was then faced with having no goods but did have an insurance claim, assuming they had arranged insurance cover. The sellers often found themselves feeling obliged to send urgent replacement shipments to keep their buyer happy. That process can also affect credit risk.

Cost, insurance and freight

The other major term used by many New Zealand exporters is cost, insurance and freight bringing us to another acronym you may have seen CIF. This term is applied when the seller delivers the goods, such as logs, to the vessel and is responsible for clearing the logs for export. The risk of loss or damage passes to the buyer once on board but the seller must arrange insurance for those goods.

The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller is only obliged to purchase institute cargo clause C cover − I will touch on what that means a little later. This is very basic coverage and may not be suitable for all cargo types, so the contract should specify the cover required depending on the cargo type. Should the buyer wish to have more insurance protection they need either to expressly agree this with the seller or to make their own additional insurance arrangements.

The complications I have seen with CIF transactions is that while the exporter arranges cover, if there is a loss during a transit it is the buyer who owns the insurance policy. It is up to the buyer to lodge the claim and work through the claim process. However, in reality, many exporters feel commercial pressure to help with this process given they placed the insurance and often want to make sure things go well to keep their buyers happy.


The other problem area I see often is when clients are importing goods. For example, say you are importing a piece of plant or equipment and insurance is part of the purchase agreement. I always encourage my clients to ask questions about the insurance in place. Is the coverage broad enough for you? Would it not be better for you as the recipient to place your own insurance cover so that you have more control over the cover and choose the insurer, and in the event of a claim have a local contact to deal with?

There is a multitude of Incoterm options that you can consider, for example delivering at place might be worth considering. The seller delivers the goods to a nominated destination, bearing all risks and costs of bringing the goods to this nominated place. Insurance should be arranged through to the nominated destination.

For inland transits within New Zealand, the Carriage of Goods Act applies. If your goods are lost or damaged in transit, you may be able to recover costs from the carrier, but the limit is $2,000 which may not be adequate. This limit in general terms applies per unit, which is generally the unit as handed to the carrier. For example, one truck load of sand is one unit, and one pallet of wine is one unit. There are exceptions where the carrier will not be deemed liable and of course there are times when the value of goods will far exceed this limit. Therefore, insurance is required to fill in the gaps.

As with all insurance, making sure you have the right cover in place is critical. All marine transits should have some insurance coverage, even if only the most basic C clauses. These C clauses will cover cargo for loss from specified perils such as fire, explosion, the vessel being sunk or capsized. The cover also extends to cover general average which is explained next.

General average

General average is another area of law which is unique to marine risk and the principle is very old. If the ship is in peril, the ship’s master can declare general average where all cargo owners on board share in the loss to save the vessel. An example would be where the crew jettison some of the cargo to save the vessel, and whatever the value of that cargo, the loss is shared by the remaining cargo owners.

Average claims occur regularly. There have been some recent high-profile events such as the Maersk Honam which suffered a fire in March this year. One gnarly marine underwriter I deal with feels that general average claims are on the rise because the value of vessels has generally fallen while the value of cargo has increased.

In terms of coverage, as mentioned above, cargo C clauses are the most basic but there is broader cover available and particular consideration should be given to assess how perishable your products are. It may surprise you that there are some specific London market insurance clauses for timber, negotiated by the International Timber Trade Association in the 1980s, and which are still used worldwide.

Chartered vessels

One other area that I come across with forestry clients involves the larger organisations which charter or lease vessels to export logs. In doing so they expose themselves to some large marine liability risk. This can be covered with the purchase of charterers’ liability insurance. The extent of their liability will be set out in the charter party agreement. However, a basic requirement in almost all agreements is that they must provide safe harbour for the vessel.

New Zealand ports and waters have a history of being challenging and with demand on ports, pressure on ship schedules and pressure on facilities, there is increasing risk. I have seen some examples where ship’s masters have issued notices of protest that the port facilities were not sufficient

Charterers liability claims are low in frequency but very high in value and we have had some high profile cases in New Zealand. Many of you may remember the Jody F Millennium which ran aground with its log cargo in Gisborne in 2002. The vessel spilled oil on to the surrounding beaches. The Maritime New Zealand website notes −

On the evening of Wednesday 6 February 2002, huge swells caused the log ship Jody F Millennium (owned by Japanese company Soki Kisen but chartered to a Korean company and registered in Panama) to break free from several of her moorings in the Gisborne harbour.

Tugs went to her assistance and attempted to hold the ship steady so she could be secured again to the wharf. However, the situation became too unsafe for the people involved, the Jody F Millennium and the wharf itself. It was decided that the best place for her was back out at sea.

As the ship left the harbour, she was hit by the heavy swell on her side and ran aground on the beach. The incident was reported to the Maritime Safety Authority, now Maritime New Zealand, at 10 pm on Wednesday, 6 February.

The salvage operation which followed was complex and costly, as was the clean-up. To face this sort of problem without adequate marine liability insurance would put most businesses at severe financial risk.

As with all risk my advice is to first consider your risk, get expert advice and go into things with your eyes open. When it comes to marine insurance, it has its own language and you need to ‘talk like a pirate’ in order to understand the terminology and manage your risk.

Aon has an insurance scheme for NZFFA members and, in support, pays a contribution to the NZFFA. Jo McIntosh is an Executive Director of Aon and specialises in insurance for forestry and horticulture.


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