INLAND MARINE COVERAGE

 

CHAPTER ONE - INTRODUCTION AND DEFINITION

HISTORY

 

During the period of time when civilization moved from an agrarian society to an industrial society, goods and methods of production of the population became more concentrated.  With this concentration, the possibilities of losses increased due to situations beyond the control of the owners; primarily by fire, wind and water.  While farmers have always suffered such losses, they compensated for part of the cost by helping each other in time of need.  The “barn - raising” of rural America was well documented as part of history, particularly in situations where property was destroyed because of fire.

 

As the industrial society expanded, protection against losses was very conservative, originally covering only losses by fire.  Policies were written by hand covering each situation differently.  As more and more businesses required this protection, more standardized wording became available, and with financial institutions investing in commercial ventures, insurance had to be provided to protect the investors interests.  This further pushed the burgeoning insurance industry to standardize coverage’s and policy provisions.

 

Marine Insurance is considered as one of the oldest (if not the oldest) types of insurance, as ships and their cargoes were protected against losses at sea by consortiums of wealthy persons who “underwrote” the protection by signing “under” the contract and noting their share of the risk.  London shipowners and “capitalists” gathered at Lloyd’s Coffee House where pools would be set up covering the possible loss of ship cargoes during transport between India and the New World, and England.  From this early beginning several hundred years ago, Marine Insurance has progressed to the Lloyd’s of London of today, and several large Marine insurance companies.  Throughout the years certain words used in the contracts became standardized and recognized by law as having specific meanings.  To this day, many Marine policies contain language that may seem archaic, such as referring to risks as “perils”, but is used because of the legal interpretations that has evolved. 

 

While the word “Marine” implies “wet” coverages, it has been expanded to where it now can cover all types of perils and risks when cargoes are shipped on land, sea or in the air.  The name, “Marine Insurance” today implies coverage of cargoes and materials on the high seas, which was the original function and is still a major type of insurance.

 

Inland Marine implies movement on land, but inland waterways are considered as “land” for this purpose.  Basically, Inland Marine insurance covers moveable property – with the exceptions of motor vehicles and airplanes which have their own insurance that is designed for the peculiarities of the inherent risks of motor vehicles and airplanes. 

 

Other forms of insurance has changed so that it is easier to understand by the consumer, and most of the antiquated language is no longer present.

 

Both fire and Marine insurance companies cover certain risks, such as fire and windstorm damage, and both casualty and Marine insurance policies can cover theft.  So, obviously, there is some overlapping.  But today many large companies can have departments providing coverage to various risks, and any conflict would just be between two departments. 

 

Originally Marine insurance was written only by companies specializing in “wet”, or Marine coverages and because of laws at that time, there was very little regulation of Marine insurance companies, therefore they could (and did) write insurance for risks that weren’t “wet” risks at all.  Further, they were not subject to the same regulations as fire and casualty insurance companies, so they could (and did) write insurance that really did not have anything to do with the movement of property or cargo.  Since they had little regulation, they could write coverages that fire and casualty companies normally wrote, and at provisions and premiums that were not available to these fire and casualty companies. 

 

As one can imagine, there were screams that echoed in the hallowed halls of the state insurance departments, particularly in the New York Insurance Department.  So in 1932, there was a ruling issued by this department that clearly defined the powers of Marine insurance companies.  The following year, the National Convention of Insurance Commissioners (predecessor to the National Association of Insurance Commissioners, the NAIC) issued a rule that is now known as the Nation-Wide Marine Definition.

 

The “Definition” states the types of exposures classified under Marine, Inland Marine or Transportation Insurance by placing them in the following categories:

• Imports
• Exports
• Domestic Shipments (Goods in transit)
• Communication Vehicles (tunnels, bridges, piers and power transmission lines)
• Personal Property Floaters (stamp collections, coin collections, fine arts, paintings, musical instruments, silverware and furs.
• Commercial Property Floaters (accounts receivable, valuable papers, valuable records, and physicians’ and surgeon’s instruments).

 

The Definition also made use of the following differences in condition:

• Electronic Data
• Property in Bailee’s custody
• Property for sale by a dealer (e.g., musical instruments, cameras, fine arts & jewelry)

 

This Definition is now the definitive clarification of the powers granted to both Marine and Inland Marine insurance companies.

 

This Marine Definition is so important to students of Inland Marine, that the student must be familiar with its terms.  The following Marine Definition is in use in the majority of the states, but Texas has its own definitions.  An earlier version (1953) may still be in use in a very small number of states.

 

 

 

1976 NATION‑WIDE MARINE DEFINITION

 

The purpose of this instrument is to describe the kinds of risks and coverages which may be classified or identified under State Insurance Laws as Marine, Inland Marine or Transportation insurance, but does not include all of the kinds of risks and coverages which may be written, classified or identified under Marine, Inland Marine or Transportation insuring powers, nor shall it be construed to mean that the kinds of risks and coverages are solely Marine, Inland Marine or Transportation insurance in all instances.

 

This instrument shall not be construed to restrict or limit in any way the exercise of any insuring powers granted under charters and license whether used separately, in combination or otherwise.

 

1. Marine and/or Transportation policies may cover under the following conditions:

 

A. Imports

 

Imports may be covered wherever the property may be and without restriction as to time, provided the coverage of the issuing companies includes hazards of transportation.

An import, as a proper subject of Marine or Transportation insurance, shall be deemed to maintain its character as such, so long as the property remains segregated in such a way that it can be identified and has not become incorporated and mixed with the general mass of property in the United States, and shall be deemed to have been completed when such property has been:

 

(a) sold and delivered by the importer, factor or consignee; or

(b) removed from place of storage and placed on sale as part of importer's stock in trade at a point of sale‑distribution; or

(e) delivered for manufacture, processing or change in form to premises of the importer or of another used for any purposes.

 

B. Exports

 

Exports may be covered wherever the property may be without restriction as to time, provided the coverage of the issuing companies includes hazards of transportation.

An export, as a proper subject of Marine or Transportation insurance, shall be deemed to acquire its character as such when designated or while being prepared for export and retain that character unless diverted for domestic trade, and when so diverted, the provisions of this Ruling respecting domestic shipments shall apply, provided, however, that this provision shall not apply to long established methods of insuring certain commodities, e.g., cotton.

 

C. Domestic Shipments

 

1. Domestic shipments on consignment, [provided the coverage of the issuing companies includes hazards of transportation] for sale or distribution, exhibit, or trial, or approval or auction, while in transit, while in the custody of others and while being returned, provided that in no event shall the policy cover on premises owned, leased or operated by the consignor.

 

2. Domestic shipments not on consignment, provided the coverage of the issuing companies includes hazards of transportation, beginning and ending within the United States, provided that such shipments shall not be covered at manufacturing premises nor after arrival at premises owned, leased or operated by Assured or purchaser.

 

D. Bridges, Tunnels and Other Instrumentalities of Transportation and Communication (excluding buildings, their improvements and betterments, furniture and furnishings, fixed contents and supplies held in storage).

 

The foregoing includes:

 

1. Bridges, tunnels, other similar instrumentalities, including auxiliary facilities and equipment attendant thereto.

 

2. Piers, wharves, docks, slips, dry docks and marine railways.

 

3. Pipelines, including on‑line propulsion, regulating and other equipment appurtenant to such pipelines, but excluding all property at manufacturing, producing, refining, converting, treating or conditioning plants.

 

4. Power transmission and Telephone and Telegraph lines, excluding all property at generating, converting or trans­forming stations, substations and exchanges.

 

5. Radio and Television Communication Equipment in use as such including towers and antennae with auxiliary equip­ment, and appurtenant electrical operating and control apparatus.

 

6. Outdoor cranes, loading bridges and similar equipment used to load, unload and transport.

E. Personal Property Floater Risks covering individuals and/or generally

1. Personal Effects Floater Policies.

 

2. The Personal Property Floater.

 

3. Government Service Floaters.

 

4. Personal Fur Floaters.

 

5. Personal Jewelry Floaters.

 

6. Wedding Presents Floaters for not exceeding 90 (ninety) days after the day of the wedding.

 

7. Silverware Floaters.

 

8. Fine Arts Floaters covering paintings, etchings, pictures, tapestries, art glass windows, and other bonafide works of art of rarity, historical value or artistic merit.

 

 9. Stamp and Coin Floaters.

 

10. Musical Instrument Floaters. Radios, televisions, record players and combinations thereof are not deemed musical instruments.

 

11. Mobile Articles, Machinery and Equipment Floaters (excluding motor vehicles designed for highway use and auto homes, trailers and semi-trailers except when hauled by tractors not designed for highway use) covering identified property of a mobile or floating nature pertaining to or usual to a household.  Such policies shall not cover furniture and fixtures not customarily used away from premises where such property is usually kept.

 

12. Installment Sales and Leased Property Policies covering property pertaining to a household and sold under conditional contract of sale, partial payment contract or installment sales contract or leased, but excluding motor vehicles designed for highway use.  Such policies must cover in transit but shall not extend beyond the termination of the seller's or lessor's interest.

 

13. Live Animal Floaters.

 

F. Commercial Property Floater Risks covering property pertaining to a business, profession or occupation.

 

1. Radium Floaters.

 

2. Physicians' and Surgeons' Instrument Floaters. Such policies may include coverage of such furniture fixtures and tenant Assured's interest in such improvements and betterments of buildings as are located in that portion of the premises occupied by the assured in the practice of his profession.

 

3. Pattern and Die Floaters.

 

4. Theatrical Floaters, excluding buildings and their improvements and betterments, and furniture and fixtures that do not travel about with theatrical troupes.

 

5. Film Floaters, including builders' risk during the production and coverage on completed negatives and positives and sound records.

 

6. Salesmen's Samples Floaters.

 

7. Exhibition Policies on property while on exhibition and in transit to or from such    exhibitions.

 

8. Live Animal Floaters.

 

9. Builders' Risks and/or Installation Risks covering interest of owner, seller or contractor, against loss or damage to machinery, equipment, building materials or supplies, being used with and during the course of installation, testing, building, renovating or repairing.  Such policies may cover at points or places where work is being performed, while in transit and during temporary storage or deposit, of property designated for and awaiting specific installation, building, renovating or repairing.

 

Such coverage shall be limited to Builders' Risks or Installation Risks where Perils in addition to Fire and Extended Coverage are to be insured.

 

If written for account of owner, the coverage shall cease upon completion and acceptance thereof; or if written for account of a seller or contractor the coverage shall terminate when the interest of the seller or contractor ceases.

 

  10. Mobile Articles, Machinery and Equipment Floaters (excluding motor vehicles designed         for highway use and auto homes, trailers and semi-trailers except when hauled by tractors not designed for highway use and snow plows constructed exclusively for highway use), covering identified property of a mobile or floating nature, not on sale or consignment, or in course of manufacture, which has come into custody or control of parties who intend to use such property for the purpose for which it was manufactured or created . Such policies shall not cover furniture and fixtures not customarily used away from premises where such property is usually kept.

 

  11.Property in transit to or from and in custody of bailees (not owned, controlled or operated                     by the bailor).  Such policies shall not cover bailee's property at his premises.

 

  12. Installment Sales and Leased Property. Policies covering property sold under conditional  contract of sale, partial payment contract, installment sales contract, or leased but excluding motor vehicles designed for highway use.  Such policies must cover, in transit but shall not extend beyond the termination of the seller's or lessor's interest.  This section is not intended to include machinery and equipment under certain "leaseback" contracts.

 

  13. Garment Contractors Floaters.

 

  14. Furriers’ or Fur Storers Customer's Policies (i.e., policies under which certificates or      receipts are issued by furriers or fur storers) covering specified articles the property of customers.

 

  15. Accounts Receivable Policies, Valuable Papers and Records Policies.

 

16. Floor Plan Policies, covering property for sale while in possession of dealers under a Floor Plan or any similar plan under which the dealer borrows money from a bank or lending institution with which to pay the manufacturer, provided:

 

1. Such merchandise is specifically identifiable as encumbered to the bank or lending institution.

2. The dealer's right to sell or otherwise dispose of such merchandise is conditioned upon its being released from encumbrance by the bank or lending institution.

3. That such policies cover in transit and do not extend beyond the termination of the dealer's interest.

Provided that such policies shall not cover automobiles or motor vehicles; merchandise for which the dealer's collateral is the stock or inventory as distinguished from merchandise specifically identifiable as encumbered to the lending institution.

 

   17. Sign and Street Clock Policies, including neon signs, automatic or mechanical signs, street clocks, while in use as such.

 

18. Fine Arts Policies covering paintings, etchings, pictures, tapestries, art glass windows, and                  other bonafide works of art of rarity, historical value or artistic merit, for account of museums, galleries, universities, businesses, municipalities and other similar interests.

 

   19. Policies covering personal property which, when sold to the ultimate purchaser, may be              covered specifically, by the owner, under Inland Marine Policies including:

(a) Musical Instrument Dealers Policies, covering property consisting principally of    musical instruments and their accessories. Radios, televisions, record players and combinations thereof are not deemed musical instru­ments.

(b) Camera Dealers Policies, covering property consisting principally of cameras and their accessories.

(c) Furrier's Dealers Policies, covering property consisting principally of furs and fur garments.

(d) Equipment Dealers Policies, covering mobile equipment consisting of binders, reapers, tractors, harvesters, harrows, tedders and other similar agricultural equipment and accessories therefor; construction equipment consisting of bulldozers, road scrapers, tractors, compressors, pneumatic tools and similar equipment and accessories therefor; but excluding motor vehicles designed for highway use.

(e) Stamp and Coin Dealers covering property of philatelic and numismatic nature.

(f) Jewelers' Block Policies.

(g) Fine Arts Dealers

Such policies may include coverage of money in locked safes or vaults on the Assured's premises. Such policies also may include coverage of furniture, fixtures, tools, machinery, patterns, molds, dies and tenant insureds interest in improvements of buildings.

 

20. Wool Growers Floaters.

 

21. Domestic Bulk Liquids Policies, covering tanks and domestic bulk liquids stored therein.

 

22. Difference in Conditions Coverage excluding fire and extended coverage perils.

 

23. Electronic Data Processing Policies.

 

II. Unless otherwise permitted, nothing in the foregoing shall be construed to permit Marine or Transportation Policies to Cover:

 

A. Storage of Assured's merchandise, except as hereinbefore provided.

 

B. Merchandise in course of manufacture, the property of and on the premises of the manufacturer.

 

C. Furniture and fixtures and improvements and betterments to buildings.

 

D. Monies and/or securities in safes, vaults, safety deposit vaults, bank or Assured's premises, except while in the course of transportation.

 

 

 

 

During this period of time, protection from fire perils was available as was protection against windstorm, hail, water damage, and other such risks later.  These coverages became known as “property insurance.”

Soon legal recourse against someone wronged by another was considered an insurable situation, and the idea of protection against liability grew into what is now called “casualty” or “liability” insurance.  Many insurers became “Property and Casualty Insurers.”  Others preferred to continue to cover only one type of peril, such as fire insurance, and these companies became known as “monoline” companies, and policies that cover only one type of peril, became known as monoline policies.

 

The distinguishing factor of Marine and Inland Marine insurance is that the subject of the insurance (property insured) is moveable – hence its name of FLOATER.  The floater policy will cover the property no matter where it may be.  Fire insurance, on the other hand, usually covers property at a fixed location. 

 

 

MONOLINE INSURANCE POLICIES

 

With the complexities of modern life and modern commerce, many commercial enterprises were faced with an increasing number of situations that were determined to be insurable.  Also, the number of types of commercial businesses also increased, each type with its own peculiarities and situations that are unique to their business.  With the increase in insurance situations, the number of insurance policies needed to cover each contingency increased dramatically, to the point where many customers had many policies.  The problems with this approach soon became apparent.

 

The sheer number of such policies became overwhelming, with a variety of coverage’s provided by a variety of insurers, frequently represented by a variety of insurance brokers.

 

With so many policies, it was inevitable that there would be duplication of some coverage’s, and with no coverage provided for other risks.

 

Legally, it became reminiscent of the biblical scholars who debated for years as to how many angels can dance on the head of a pin, i.e. since there was little standardization of wording, legal interpretations were abundant.  Many consumers paid for years to protect themselves and their businesses against certain risks of doing business, only to find that the wording of the policy did not provide the coverage they thought they had purchased.

 

 

 

MULTILINE POLICIES

It soon became apparent that the only solution was to “package” policies.  Therefore, the “multiline” policy was born, which is several of the risks previously insured under separate policies, now packaged into one policy.  This has several advantages:

 

To the Insured:

 

• There are fewer policies to purchase and maintain.

 

• The chance of delay in loss settlement due to disputes of different insurers, is substantially reduced.

 

• The insured benefits from reduced  administrative expense.

 

To the insurance company:

 

The administrative expense is lessened because it costs less to underwrite and issue one policy instead of several.

 

Package policies help insurers avoid adverse selection by spreading the risk among various insureds and among the various risks covered under the package policy.

 

Packaging is also advantageous for the insurance agent as it facilitates selling a policy to cover the insured’s entire account, and many packages are more easily sold and rated, so the agent can quickly and efficiently provide quotes.

 

Today, the Commercial Package Policy (CPP) consists of various coverages, assembled as modules, as shown in the following illustration.  As indicated, Inland Marine may, or may not, be part of a CPP.  When part of a CPP, there are certain provisions that are the same among all of the coverages.  On the other hand, the various coverages could still be written in most cases, on a monoline basis. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

THE ROLE OF THE INSURANCE SERVICES OFFICE

 

Insurance is a statistic - driven business.  The premiums to be charged for any insurance coverage must be based upon statistics derived from actual experience, either of the insurance company itself, or from an industry average.  And statistics can only be meaningful if there is enough experience to provide a broad base upon which to forecast future losses and expenses.

 

If each insurer attempted to collect sufficient statistics to provide adequate premiums, the expenses would be excessively high, and the reliability of the statistics could be questioned, as it would probably not be based upon an adequate base.  However, if companies banded together and shared their experience, the expenses would be drastically reduced for each company. 

 

Therefore, most companies use the services of the Insurance Services Office (ISO) which is a statistic - gathering organization located in New York.  While it initially was involved in providing advisory rates to its subscriber members, it has since withdrawn from providing rates, and now provides policy forms and endorsements and manual rules for its members.  It should be noted that subscriber members are free to use whatever policy forms and rates they choose, but the information provided by the ISO is considered as “Standard” wording for the purposes of this text. 

 

The American Association of Insurance Services, a competing firm, provides similar services to approximately 400 regional insurers.

 

The ISO rewrote all of the standardized commercial forms into more easily understood language

 

The differences between the monoline and the multiline policy forms were eliminated, with the welcome result that one set of forms can be used for one coverage or many.  Much more flexibility was obtained as the customer no longer had to accept the standard coverage’s, but could construct a policy using the forms that they specifically needed.

 

In 1986 the ISO rewrote the Commercial Inland Marine policies as part of the policy simplification process.  The format allows an Inland Marine coverage part to be used independently (Monoline) or as a Multi-line policy if needed, as discussed above. 

 

When the Inland Marine Form is complete, it consists of

 

• Declarations
• Inland Marine Coverage form(s) –(one or more)
• Common Policy Conditions pages
• Policy Conditions applicable to the Commercial Inland Marine Coverage form
• Endorsement(s) – if needed

 

The Insurance Service Office divides the Commercial Inland Marine coverages into twelve classes, as follows:

 

• Accounts Receivable
• Camera & Musical Instruments Dealers
• Commercial Articles
• Equipment Dealers
• Film
• Floor Plan
• Jewelers Block
• Mail
• Physicians And Surgeons
• Signs
• Theatrical Property
• Valuable Papers

 

 

RATES & FILED/NONFILED FORMS

 

(Sometimes they are referred to as “controlled” and “noncontrolled.”)

 

Filed forms are simply those forms that have been filed in the states with the insurance department(s).  These forms and rates must be approved by the state insurance department(s) before the insurance company can write the form in that state(s).  As a general rule, filed forms and rates are used for risks where there are a large number of insureds with similar exposures.  Examples might be jewelry, coin collections, etc.

 

Determining whether a particular form is exempt under state laws from filing can be a little confusing at times.  Some states take a very strong approach and issue bulletins showing which classes of business must be filed.  Other states take the approach that “Inland Marine risks which by general custom of the business are not written according to manual rates or rating plans” need not be filed.  The final determination is really a matter of experience of the insurance company and its underwriters as they become acquainted with the requirements of the various states.  Under the latter approach, the key is whether the forms, rules and rates for a particular form has been filed by one of the two rating organizations, the Insurance Service Offices (ISO) or the American Association of Insurance Services (AAIS).  If they do not make a filing for a particular class of business, it can be assumed that it is a nonfiled class. 

 

As far as the underwriter is concerned, when reviewing a particular class of business, there is a lot more flexibility in the underwriting of nonfiled business.  The underwriter, therefore, is free to determine the policy provisions that will apply and the rates to fit the specific situation.  More than 50% of all Inland Marine business is written on a nonfiled basis.

 

With filed business, there is not the flexibility and underwriters can depart from the published rates and provisions (deviate) in some cases by making some modifications at their discretion, such as changing territory, etc.  Otherwise, no changes can be made unless it has the written approval of the insured and is filed with the particular insurance department.

 

Insurers do not have to use a rating organization, indeed it is the duty of the insurance company to make filings and rates.  The rating organizations make these filings on behalf of many insurers, but all insurers do not do this and will file their own, independent, filings.  An independent filing may be used if the insurer feels it is to their advantage to do so.

INLAND MARINE LOSS EXPOSURES

 

A loss exposure is simply the possibility of a financial loss.  Principles of Risk Management and Exposure, volume one, state that “Every ‘loss exposure’ has 3 elements:

• the item that is subject to the loss,
• the “perils” or forces that may cause the loss, and
• the potential financial impact of the loss”.

 

 

An unusual element of Inland Marine insurance is that often times it involves a property, the loss of which can impact more than one party, as in the Consumer Application above.

INLAND MARINE PERILS

 

 

It is of the utmost importance to understand which perils are covered and which are excluded in an Inland Marine policy.  Of course, this will depend upon what the needs of the insured are and what the insurance company will accept.  It must also be “commercially feasible” to insure the risk.  For instance, it would not be commercially feasible to insure war or nuclear reaction perils.

 

 

 

 

ALL-RISKS APPROACH

 

This is much more commonly used in Inland Marine insurance that Named Perils.  It does not specifically name the perils to be covered, but uses an exclusionary approach, i.e., it states which causes of loss are NOT covered.  This is accomplished by using various exclusions.  The term, “All-Risks” is now not used as often, as originally it meant that the insurer would pay all losses covered “by all risks of direct physical loss or damage.”

 

An important practical effect of this approach is that the burden of proof is on the insurance company in case of a loss.  This means that if the insurance company cannot prove that the loss is specifically excluded under the policy, the insurer must pay.

 

NAMED PERILS APPROACH

 

Conversely, if the Named Perils approach is used, only those perils specifically named in the policy are covered.  As an example, the following Named Perils would be insured against direct loss or damage by:

 

• fire,
• windstorm,
• explosion,
• hail,
• riot including riot attending a strike,
• civil commotion,
• vehicles not owned or operated by the insured,
• aircraft,
• smoke,
• accident to conveyance, and
• burglary.

 

However, just because a peril is a Named Perils in a policy, does not mean that it will be covered carte blanche.  One example often quoted is “burglary.”  Most policies define burglary as “taking of property, etc… from inside, leaving marks of forcible entry or exit.”  If there were no signs of forcible entry or exit, the policy would not cover the loss by burglary.

 

With the Named Perils approach, the burden of proof of loss is on the insured, and if the insured cannot make such proof of loss, then the insurer does not pay.

 

While not being used as often as the All-Risks coverage, the Named Perils approach is used quite often for certain types of Inland Marine business.

 

PROXIMATE CAUSE

 

Mention must be made here of the doctrine of proximate cause, as it should be understood in order to determine what would be considered as a “covered peril.”  Proximate cause is best described in the definition of a “direct loss.” 

 

 

 

 

 

 

 

There have been numerous law suits involving this doctrine, and there will probably be more in the future.  Even though a lengthy discussion of this could prove entertaining, it really is outside of the purpose of this text.  One other point, however: 

 

WHO IS AFFECTED WHEN PROPERTY IS LOST, DAMAGED OR DESTROYED.

 

One might think that the person affected would always be the owner.  But in Inland Marine insurance, others that may be affected could be

 

• others who use the property,
• common carriers and bailees (whose responsibilities are similar) or
• those who lend money to the owners of the property.

     PROPERTY OWNERS

If some property has a value to the owner, and it is lost, damaged or destroyed, then the owner obviously occurs a financial loss because the property will have to be replaced or repaired.

     COMMON CARRIERS AND BAILEES

A “Bailee” is a person to whom property is entrusted, or, stating it in another way, an individual who has temporary rightful possession of another’s property.  Dry cleaners come immediately to mind, but a bailee could also be a trucking company or a repair shop or garage, etc.  Bailees and common carriers can become liable for loss or damage to property in their care, custody or control.

 

USES OF PROPERTY

Those who use property of another can face exposures with respect to that property.  For instance, one who leases or rents property may be liable for damage to that property while under their care or usage.  An interesting situation arises when a tenant rents a building and before they move in, they remodel or add rooms, etc., to the building.  These additions are called “improvements or betterments” and become property of the building owner.  If the additions are destroyed, the tenant still has a legal responsibility to replace or repair the improvements or betterments.

LENDERS

If a person borrows money from a lender to purchase property, the lender still maintains certain conditional rights to that property, such as the right to repossess the property in the person does not repay the loan.  These are called “secured” loans, and the lender is a “secured lender”, and the creditor is a “secured creditor.”  If the money is used to purchase a home or a building, then the lender is a “mortgagee” and the borrower is a “mortgagor.” 

 

In effect, both parties can be the victims of a loss.  Frequently a lender may protect its interest by requiring that the borrower provide an insurance policy that names the lender as the “loss payee.”  Sometimes a policy will have an endorsement, a “loss payable endorsement”, that specifically states that in case of a loss, the lender will be paid to the extent of its interest in the property.

 

Sometimes the lender purchases its own insurance on the property.  Installment sales policies and floor plan policies are both types of policies that can be issued to insure the lenders interests.

FINANCIAL CONSEQUENCES

 

Continuing with the discussion of losses and the effects on individuals, the loss of property will have undesirable financial consequences in most cases, and the impact may occur as a loss, which may:

 

• reduce the property value
• cause an increase in the owner’s – or other’s – expenses, or
• reduce the owner’s – or other’s – income.

 

REDUCTION OF VALUE

Obviously an insured loss will reduce the value of the property, but the actual amount can be calculated in different ways. 

 

• If the property can be repaired or restored, a measure in reduction in value is the cost of repair or restoration.

 

• Property that must be completely replaced has no remaining worth (unless as “junk” or salvage).

 

• If property is lost, stolen, or just disappears, the value to the owner is reduced as if it had been completely destroyed with no salvage value.

 

• If repaired property is worth less than it would be worth if it had not been damaged, then the owner not only faces the cost of repair or restoration, but also the reduction in the value because of the fact that it has changed condition.

 

An article of property may have a number of different of different values, depending upon the method by which the value is determined.  In Inland Marine insurance, the most common measures of value are

 

• actual cash value,
• invoice cost, or
• agreed value.

These will all be discussed later in this text.

 

INCREASED EXPENSES

When property is damaged, not only will the owner suffer a loss in value, they must also suffer the costs and expenses of repair or acquiring a temporary substitute, or even, in some cases, maintaining the property in useable condition.

 

 

 

LOST INCOME

Frequently, the property insured under an Inland Marine policy is used to generate income, so if the property is damaged or lost, income will be lost and may remain gone until the property is replaced, restored or repaired.

 

This area can be most difficult in projecting the business income that could be lost.  Things such as the future level of activity must be taken into consideration, and then all different kinds of situations – “worse scenarios” – must be explored.  The only practical way to do this would be to determine what the business presently makes and the expenses it normally occurs, and then compare it to what would happen in case of a property loss.  The comparison between the two gives the potential loss of income to the business.

 

 

STUDY QUESTIONS

 

1.  Basically, Inland Marine insurance covers _____________ property, excepting motor vehicles and airplanes.

      A.  permanent

      B.  Real

      C.  moveable

      D.  commercial

 

2.  The Nation-Wide Marine Definition

A.  states the types of exposures classified under Marine, Inland Marine, or Transportation Insurance by placing them into categories.

      B.  lists the types of exposures that may be insured by Marine insurance.

      C.  defines the differences between Marine insurance and Casualty insurance.

      D.  categorizes various liability exposures.

 

3.  The kinds of risks and coverages listed in the Nation-Wide Marine Definition

A.  shall be construed to mean that they are solely Marine, Inland Marine, or Transportation insurance only.

      B.  restricts or limits the exercise of any insuring powers granted under
                charters and license.

      C.  includes all of the kinds of risks and coverage insurable under Marine and
                 Inland Marine insurance.

      D.  does not include all the kinds of risks and coverages which may be
                 written, classified or identified under Marine, Inland Marine or
                 Transportation insurance.

 

4.  Which of the following is NOT an advantage of a Multiline policy?

      A.  There are fewer policies to purchase and maintain.

      B.  Each risk category has its own policy.

      C.  The chance of delay is settling losses is reduced,

      D.  The insured benefits from reduced administrative expenses.

 

5.  The Insurance Service Office (ISO) is

      A.  a branch of the State Insurance Departments.

      B.  a rating bureau.

      C.  a statistic gathering organization.

      D.  part of the Federal Housing and Human Development Agency.

 

6.  All Inland Marine business can be written as either ________ or  _________.

      A.  Marine or Inland Marine.

      B.  filed or nonfiled.

      C.  Inland Marine or Transportation insurance.

      D.  Bailee or Bailor.

 

7.  A “Peril” is

      A.  a cause of a loss.

      B.  a possibility of a loss.

      C.  uncertainty of financial loss.

      D.  a man-made danger.

 

8.  The two basic methods of expressing which perils are covered in an Inland Marine policy, are

      A.  Marine and Transportation.

      B.  Blanket and Unscheduled.

      C.  All-risks and Named Perils.

      D.  Limitations and Exclusions.

 

9.  A covered peril is the ____________ if it is the cause that initiates an unbroken chain of events contributing to the loss.

      A.  direct loss

      B.  approximate loss

      C.  proximate cause

      D.  symbiotic cause

 

10.  In Inland Marine insurance, the most common measures of value do not include

      A.  actual cash value.

      B.  auctioneered value.

      C.  invoice cost.

      D.  agreed value.

 

ANSWERS TO STUDY QUESTIONS

 

1C     2A     3D     4B     5C     6B     7A     8C     9C     10B