The Law of Carriage of Goods by Sea and Marine Insurance

REPUBLIC OF KENYA
TECHNICAL AND VOCATIONAL

EDUCATION AND TRAINING
Diploma in Maritime Transport Logistics
The Law of Carriage of Goods

by Sea and Marine Insurance
Trainee Manual
2018
Kenya Institute Curriculum Development Kenya Maritime Authority
P O Box 30231 - 00100 P O Box 95076 - 80104
Tel. 020–3749900-9 Tel.041-2318398/9/020-2381203/4
Email: info@kicd.ac.ke Email: info@kma.go.ke
Off Murang’a Road White House, Moi Avenue
NAIROBI MOMBASA
First published in 2018
© Kenya Institute of Curriculum Development

Kenya Maritime Authority
All rights reserved. No part of this manual may be photocopied

or reproduced in any form without written permission from the
publisher. Moreover, no part of this publication can be stored in
a retrieval system, transmitted by any means, or recorded or
otherwise, without written permission from the publisher.
.
ISBN………………
Table of Contents
Foreword.......................................................................................................... i
Acknowledgement ..........................................................................................ii
The Law of Carriage of Goods by Sea

16.2.0 The Law Of Carriage of Goods By Sea ..................................2
16.2.01 Introduction to Law of Carriage of Goods By Sea .................2
16.2.02 Breach And Remedies: Contracts Of Carriage Of Goods By

Sea ...........................................................................................9
16.2.03 Dispute Settlement Under The Law of Carriage of Goods By
Sea .........................................................................................15
16.2.04 Freight....................................................................................20
16.2.05 Tortious Liability ..................................................................24
16.2.06 International Conventions Applicable to The Carriageof

Goods By Sea .......................................................................26
16.2.07 The Bill of Lading ................................................................28
16.2.08 Seaway Bill............................................................................37
16.2.09 Charterparty ..........................................................................42
16.2.10 Emerging Issues and Trends .................................................50
Reference .....................................................................................................56
Marine Insurance
List of Figures ...............................................................................................58

List of Tables..................................................................................................59
26.3.0 Marine Insurance........................................................................60
26.3.01 Introduction to Marine Insurance...............................................60
26.3.02 Marine Insurance Market ...........................................................73
26.3.03 Risks & Perils in Maritime Transport ........................................85
26.3.04 Marine Insurance Contract..........................................................90
30.3.05 Application of Principles of Insurance .....................................105
26.3.06 Marine Insurance Underwriting ...............................................110
26.3.07 Marine Cargo Claims ...............................................................122
26.3.08 Hull and Machinery Claims .....................................................132
26.3.09 Legislations Affecting Marine Insurance in Kenya .................142
26.3.10 Emerging Issues and Trends ....................................................147
References ...................................................................................................153
FOREWORD
This trainee manual is designed for Diploma in Maritime Transport

Logistics. It provides a well-structured training process that is critical
in achieving the objectives of the developed syllabus. The anticipated
success from use of the comprehensive manual will accord learners not
only the opportunity to fully understand the subject matter but also ease
evaluation of learners’ progress.
Through the modular and competency-based approach that was

adopted in developing the curricula, the trainees will exit to the world
of work and easily re-enter the course at their own comfortable pace.
I would like to acknowledge the input of the staff of Technical and

Vocational Education and Training (TVET), the management and staff
of the Kenya Maritime Authority and maritime industry stakeholders.
Their valuable input, comments and feedback were indispensable in the
development of the manual.
Julius O. Jwan (PhD)

CHIEF EXECUTIVE OFFICER
KENYA INSTITUTE OF CURRICULUM DEVELOPMENT
i
ACKNOWLEDGEMENT
The key strength of Kenya’s maritime services sector would be its firm
educational and professional foundation of highly qualified and competent
workforce. Kenya Maritime Authority in line with its mandate developed
curriculum for maritime transport logistics.
Development of the trainee manual for the above curriculum required

considerable expertise from both Private and Public sector industry
practitioners through professional guidance from the Director and staff of
Technical and Vocational Education and Training (TVET) of Kenya Institute
of Curriculum Development (KICD).
To these parties, the staff and management of Kenya Maritime Authority

sincerely express gratitude for the role they played in making the realization
of the project a great success.
It is only through effective development of the human resource capacity that

the transport logistics sector can enhance its contribution to the realization of
the Kenya Vision 2030, the Big 4 Agenda and the wider Blue economy
aspirations. The trainee manual will therefore go a long way in not only
facilitating effective implementation of the curriculum but greatly help create
a pool of experts for efficient and effective service delivery in the sector.
Maj. (Rtd.) George Nyamoko Okong’o

DIRECTOR GENERAL
KENYA MARITIME AUTHORITY
ii
The Law of Carriage of Goods
by Sea
1
16.2.0 THE LAW OF CARRIAGE OF GOODS BY SEA
16.2.1 Introduction
This module unit is intended to equip the trainee with knowledge, skills and
attitudes that will enable him/her apply the law of carriage of goods by sea.
16.2.2 General Objectives

By the end, of the module unit, the trainee should be able to:
a) apply the law of carriage of goods
b) select appropriate remedies for a breach of contract in the carriage of
goods by sea
c) select appropriate dispute settlement mechanism in the carriage of goods
by sea
d) demonstrate an understanding on the international conventions governing
the carriage of goods by sea
16.2.01 INTRODUCTION TO LAW OF CARRIAGE OF GOODS BY

SEA
Introduction
This module unit is intended to equip the trainee with knowledge, skills and
attitudes that will enable him/her apply the law of carriage of goods by sea.
16.2.01T Specific Objectives

By the end of the sub-module unit, the trainee should be able to:
a) explain the meaning of Law of Carriage of goods by sea;
b) explain the meaning of Contracts of Carriage of goods by sea
c) describe the historical development of law of carriage of goods by sea
d) explain scope of the law of carriage of goods by sea
Task1: Explaining the meaning of Law of Carriage of goods by sea;
Carriage of Goods by Sea

When a ship owner, either directly or through an agent, undertakes to carry
goods by sea, or to provide a vessel for that purpose, the arrangement is
2
known as a contract of carriage of goods by sea. There are different types of
contracts of carriage of goods by sea these include bill of lading and
charterparties. Where the shipowner agrees to make available the entire
carrying capacity of his vessel for either a particular voyage or a specified
period of time, the arrangement normally takes the form of a charterparty.
On the other hand, if he employs his vessel in the liner trade, offering a
carrying service to anyone who wishes to ship cargo, then the resulting
contract of carriage will usually be evidenced by a bill of lading. The
distinction between bill of lading and charter party may not be clear
sometimes for example an operator may charter a vessel and employ it on a
liner trade. As such, charter party will govern the contract between the
shipowner and the operator whereas the contract between the operator and
the shippers /consignees will be governed by the bill of lading.
International conventions have been put in place to regulate the contract of

carriage of goods by sea, namely Hague rules, Hague Visby rules, Hamburg
rules, Rotterdam rules and Multimodal Convention.
Meaning of law: Law consists of a series of rules regulating behaviour, and

reflecting to some extent, the ideas and preoccupations of the society within
which it function. In every society, law exists within a particular legal system
and all legal rules are premised on the rule of law.
Nature of law of carriage of goods by sea: The law of carriage of goods by

sea is by nature contractual. Parties to a contract of carriage of goods by sea
may be liable in contract and in tort. As a result liability under contracts of
carriage of goods by sea may be contractual or tortious in nature.
Task 2: Explaining the meaning of Contracts of carriage of goods by

sea Meaning of a contract
Contracts of carriage of goods by sea are based on the same general

principles as general contract law. In this regard, in deciding whether the
parties have reached an agreement it must be established whether all the
elements of a contract are present so that it is enforceable in law. The
following are the elements of a valid contract:
3
a) Offer and acceptance – An offer is an expression of willingness to
contract on specified terms made with the intention, actual or apparent,
that it is to become binding when it is accepted by the person to whom it
is addressed. The person making the offer is called an offeror and the
person who accepted the offer is known as the offeree.
b) Intention to create legal relationship – the parties must have the
intention to create legal relations either by words or conduct. An
acceptance on the other hand is a final and unqualified expression to
accept the terms of the offer.
c) Consideration –a vital element in the law of contracts, consideration is
a benefit which must be bargained for between the parties, and is the
essential reason for a party entering into a contract. This can be in the
form of money).
d) Capacity of parties - The incapacity of one or more contracting parties
may defeat an otherwise valid contract. examples of incapacitation
include mentally unfit, a minor etc
e) Consent– means that contracting parties must be in agreement to create
legal relations as between or among themselves.
f) Lawful object – Any agreement that is made to achieve criminal or
immoral purpose or object as between or among the contracting parties
is not enforceable in law.
g) Certainty of terms – An agreement may lack contractual force because
it is so vague or uncertain that no definite meaning can be given to it
without adding further terms.
h) Possibility of performance - It is a general requirement of contract law
that the terms of a contract must be possible to perform. Any terms in a
contract which is impossible to perform is thus invalid and cannot be
legally enforceable.
i) Legal formalities - contracts can be oral or written as long as they
satisfy the elements of a contract.
Nature of the contract of carriage of goods by sea: The fundamental

principles of contract law are applicable to all contracts including contracts
relating to shipping.
4
Discharging the contract of carriage of goods by sea: Discharge of
contract means the release of a party to a contract from their obligations
under the contract to which they entered. Contracts of carriage of goods by
sea may be discharged in the same way as general contracts. In this regard,
contracts may be discharged by performance, agreement, frustration or by
breach.
a) Performance - Ideally, a contract is discharged by the performance by
parties of their obligation thereunder.
b) Discharged by Agreement - This discharge of contract by agreement of
parties prior to full and complete performance by one or all parties of
their obligations under the contract. Thus a distinction has to be drawn
between those contracts which have been wholly executed on one side,
that is, where one party has performed all his obligations under the
contract and those which are executory on both parties, that is, where
both parties still have some obligation to perform.
c) Discharge by frustration – A contract may be discharged on the
ground of frustration when something occurs after the formation of the
contract, which renders it physically or commercially impossible to
fulfil the contract or transforms the obligation to perform into a different
obligation from that undertaken at the time the parties entered into the
contract.
d) Discharge by breach – where one party to the contract fails to perform
and/or observe the terms and conditions of a contract, this renders the
contract discharged.
Task 3: Describing the historical development of law of carriage of

goods by sea
There are various international conventions related to the law of contract of

carriage of goods by sea. These are:-
a) Hague Rules 1924;
b) Hague-Visby Rules 1968 and/or 1979; or
c) Hamburg Rules 1978;
d) Multimodal Convention, 1980;
e) Rotterdam Rules, 2008,
5
It has been said that The Hague, Hague-Visby rules objective was to offer
wide protection to carriers by maintaining excepted clauses against loss off
and damage as well as clauses on limits of liability of carrier which proved
favourable. The Hague, Hague-Visby Rules were regarded by many cargo-
owning countries as constituting a laborious set of rules notwithstanding the
1968 amendments which continued to favour carrier interests and the
expense of cargo owner interests. This movement culminated in the drafting
of a new Convention, which was adopted, at an international conference
sponsored by the United Nations in Hamburg, in March 1978. The
Convention known as the ‘Hamburg Rules’, came into force in November
1992.
The United Nations Convention on International Multimodal Transport of

Goods (Multimodal Convention (1980) has been said to have a sound
approach in terms of carriage of goods by sea, which under Art. (1) applies
to the carriage of goods by at least two different modes of transport, not
being limited to a sea carriage and another mode of carriage as is the case
under the Rotterdam Rules. It has however never come into force.
“The United Nations Convention on Contracts for the International Carriage

of Goods Wholly or Partly by Sea” commonly referred to as the ‘Rotterdam
Rules’ was opened for signature at Rotterdam in October 2009. The
Rotterdam rules attempts to consolidate all the three Conventions into one
unifying Convention taking into account technological know-how and
commercial developments since the adoption of Hague-Visby and Hamburg
Conventions. It further provides a universal regime to support the operations
of multimodal transportation.
Bills of lading: During the eleventh century, the bill of lading was unknown.
It was at this time when trade between the ports of the Mediterranean began
to grow significantly. Some record of the goods shipped was required, and
the most natural way of meeting this need was by means of a ship’s register
complied by the ship’s mate. Although use of such a register probably began
informally, it was soon, in some ports at least, placed upon a statutory
footing. Its accuracy was paramount and, around 1350, a statute was enacted,
which provided that if the register had been in the possession of anyone but
6
the clerk, nothing that it contained should be construed as true. By the
fourteenth century, what was later to be accomplished by the receipt function
of the bill of lading was being accomplished by an on-board record. As such
the bill of lading up to the fourteenth century was purely a receipt. During
the sixteenth and seventeenth centuries, when it ceased to be possible to
enter a charterparty with every single shipper, some bills were issued that
contained the contract of carriage, although these were not prevalent. During
this period, bills of lading came to represent the holder’s entitlement to
delivery of the goods by virtue of customs of the merchants.
The modern history of the bill of lading begins at the end of the eighteenth
century when the bill of lading was construed as passing title of property in
the goods to the transferee. By the nineteenth century the bill of lading
developed its most important feature, its ability to give the holder symbolic
possession of the goods. This development took place in the first half of the
nineteenth century. To date, the bill of lading retains these three
characteristics.
It is worth noting that the international conventions to be discussed later in

the unit makes reference to terms, conditions and principles governing the
bill of lading.
Charterparties: The person hiring the ship for the carriage of goods by sea
either wholly or partly on a given voyage (s) or for a given period of time is
called the charterer, and the ship is said to be chartered or under charter.
Almost until the second half of the nineteenth century charterparty contracts
were usually made under seal. They embodied the terms upon which the
shipowner lends the use of the ship, and contained stipulations as to the rate
of remuneration, the nature of the voyage and the time and mode of
employing the vessel. These forms of contracts are what has in recent times
developed to charterparty. Historically there are different types of charter
parties. These are voyage, time and demise (bareboat).
Task 4: Explaining the scope of the law of carriage of goods by sea
Article 10 of the Hague Rules stipulates that the provisions of the

Convention shall apply to all bills of lading issued in any of the contracting
7
States. However, the above provision was deleted and replaced by Art. 5 of
the Visby amendments, stating that the provisions of the Convention shall
apply to every bill of lading relating to the carriage of goods between ports in
two different states if: (a) the bill of lading is issued in a contracting States,
or (b) the carriage is from a port in a contracting State, or (c) the contract
contained in or evidenced by the bill of lading provides that the rules of this
Convention or legislation of any State giving effect to them are to govern the
contract.
Each contracting State shall apply the provisions of the Convention to the
bills of lading mentioned above. The Hague-Visby Rules are not applicable
when the consignee receives the cargo from a non-contracting State even
though it is located in a contracting State. The Hague-Visby Rules are
therefore applicable only when the cargo leaves the contracting State.
The Hamburg rules under article 2, are applicable to all contracts of carriage
by sea between two different States, if
a) the port of loading as provided for in the contract of carriage by sea is
located in a contracting State, or
b) the port of discharge as provided for in the contract of carriage by sea is
c) one of the optional ports of discharge provided for in the contract of
carriage by sea is the actual port of discharge and such port is located in a
contracting State, or
d) the bill of lading or other document evidencing the contract of carriage
by sea is issued in a contracting State, or
e) the bill of lading or other document evidencing the contract of carriage
by sea provides that the provisions of the Convention or the legislation of
any State giving effect to them are to govern the contract.
Under all Conventions carriage must be international and must be linked to a

contracting State. But while in the Hague-Visby Rules it is required for their
application that either the bill of lading or the port of loading be located in a
contracting State, in the Hamburg Rules the place of issuance of the bill of
lading is rightly ignored because it may not be connected at all with the
voyage, but reference is made to both the port of loading and to the port of
8
discharge. Therefore the Hague-Visby Rules do not apply to a contract from
a port located in a non-contracting State to a port of discharge located in a
contracting State, while the Hamburg Rules do apply. In addition, they both
apply when they or a national law giving effect to them are incorporated in
the bill of lading.
Under the Rotterdam Rules, article 5, the geographical connecting factors are
instead the places of receipt and of delivery and the ports of loading and of
discharge, the first two connecting factors having been added because the
Rules apply also to door-to-door (combined transport) contracts under which
receipt and delivery may be inland. Combined transport is a contract for the
carriage in which more than two modes of transportation are engaged, but
only a carrier undertakes whole coverage of the carriage. Under the current
containerized transport, the carriage of goods by sea is easily connected to
combined transport and this is reflected in the Rotterdam rules.
Under the Multimodal Convention, article 2 makes reference to the scope of

the Convention. The Convention is yet to come into force. The provisions of
the Convention shall apply to all contracts of multimodal transport between
places in two States, if:
a) the place for the taking in charge of the goods by the multimodal
transport operator as provided for in the multimodal transport contract is
b) the place for delivery of the goods by the multimodal transport operator
as provided for in the multimodal transport contract is located in a
contracting State.
16.2.02 BREACH AND REMEDIES: CONTRACTS OF CARRIAGE

OF GOODS BY SEA

a) explain the meaning of breach of contract in the carriage of goods by sea
b) describe forms of breach of contract in the carriage of goods by sea
c) explain the effects of breach of contract in the carriage of goods by sea
d) explain the action for damages in the carriage of goods by sea
9
e) describe remedies other than damages in the carriage of goods by sea
Task 1: Explaining the meaning of breach of contract of carriage of

goods by sea
Introduction
The discussion on the meaning of breach of contract of carriage of goods by
sea is based on nature of breach in the carriage of goods by sea and
specifically nonperformance, breach of conditions and warranties, breach by
frustration and delay.
Nature and effect of Breach
Non-performance
The general rule is that the parties must perform precisely all the terms
of the contract in order to discharge their obligations. Thus when a party
having a duty to perform a contract fails to do that, or does an act
whereby the performance of the contract by him becomes
impossible, or he refuses to perform the contract, there is said to be a
breach of contract on his part. On the breach of contract by the one party,
the other party is discharged of his obligations to perform his part of the
obligations.
Breach of condition and warranties
A condition is a basic term, non-performance of which would render
performance of the remaining terms something substantially different
from what was originally intended. Consequently, the breach of such a
term would entitle the party not in default to treat the contract as
repudiated and itself as discharged from performance of all outstanding
obligations under the contract. Conversely, a warranty is a minor term,
breach of which can be adequately compensated for by the award of
damages. The breach of such a term will not therefore release the
innocent party from performance of its contractual obligations
10
Breach by frustration
A contract may be discharged by frustration. A contract may be
frustrated where there exists a change in circumstances, after the
contract was made, which is not the fault of either of the parties, which
renders the contract either impossible to perform or deprives the contract
of its commercial purpose. Where a contract is found to be frustrated,
each party is discharged from future obligations under the contract and
neither party may sue for breach.
Breach by delay
When a ship intentionally changes her route or remains in port without
just cause, the ship's new route or delay is called a deviation. Unless the
contract permitted otherwise, in either case there is a breach of contract by
the party responsible for the deviation.
There is no breach of the term if a ship deviates on reasonable grounds as,

for example, to avoid the dangerous weather or to save the life at sea,
although deviation to save property at sea is not a permitted deviation in
common law as it is under the Hague-Visby Rules.
Delay amounts to a deviation when it is such as to substitute an entirely

different service from that contemplated. It must make the voyage
different from the contract voyage. The proper test to apply in order to
decide whether there is a delay is whether that delay is such as to frustrate
the commercial purpose of the venture. Where the neglect of the ship-
owner to proceed to the port of loading with due diligence does not
generally entitle the charterer to refuse to load. But when the delay is such
as in effect to frustrate the intended adventure, the charterer will be
entitled to reject the ship.
Breach of Intermediate terms:

A term is an intermediate (or innominate) term if the remedy for its breach
depends on the effect of the breach at the time it happens. If the effect of
the breach substantially deprives the innocent party of the whole of the
benefit of the contract then it will be a serious, or fundamental, breach of
the term and the remedy will be for breach of
11
condition. That is, the innocent party can terminate the contract. If this is
not the case, then the remedy will be for breach of warranty.
Repudiatory breach
A breach of contract that gives the aggrieved party the right to choose
either to end the contract or to affirm it. In either case, the aggrieved
party may also claim damages. A breach of condition is normally
repudiatory, as is breach of an intermediate term that deprives the other
party of substantially the whole benefit of the contract. A contract may
also be repudiated before the time for performance has arrived.
Task 2: Explaining the Forms of breach of Contract in the carriage of

goods by sea
A breach of contract occurs when one party refuses or fails to perform one
or more of the obligations under the contract. There are various forms of
breach of contract.
A material / actual breach is when there is a failure to perform a part of a

contract that permits the other party of the contract to ask for damages
because of the breach that has occurred.
An anticipatory breach of a contract is when the non-breaching party

realizes that the other party of the contract will fail to perform his or her part
of the contract in the future and can terminate the contract and sue for
damages before the breach happens.
The party in default may either expressly repudiate liability under the
contract, do some act which renders further performance of the contract
impossible, or simply fail to perform when performance is due. The effect of
any breach is to give rise to an automatic right of action for damages and, in
certain cases, may entitle the innocent party to treat itself as discharged from
all further obligations under the contract.
Breach of contract of carriage of goods by sea may include the following

circumstances:
a) Providing an unseaworthy vessel;
12
b) Failure of duty of care i.e. Where cargo is damaged or lost;
c) Failure to name safe port i.e. A port which is in a country where there is
war or ice prone port;
d) If notice of readiness is tendered and charterer is not responding;
e) Working beyond laytime i.e. Charterer working beyond the stipulated
agreed number of days;
f) Failure of port giving metrological information.
Task 4: Explaining the Action for damages in the carriage of goods by

sea
Introduction
The object of any litigation or arbitration is normally to obtain compensation
for losses resulting from breach of the contract of carriage of goods by sea.
The party injured by the breach is entitled to claim damages whether or not
the breach is sufficiently serious to allow it to regard the contract as having
been discharged. In approaching the problem of assessing such compensation,
the courts have to deal with the following distinct issues: first, the question of
remoteness of damage and, secondly, the question of measure of damages.
The general rule here is that the injured party must be placed, in so far as
money can do it, in the same situation as if the contract had been performed.
The two issues of remoteness of damage and measure of damages will now
be considered separately in more detail:
a) Remoteness of damage:
The term remoteness refers to the legal test of causation which is used
when determining the types of loss caused by a breach of contract or duty
which may be compensated by a damages award. Legal causation is
different from factual causation which raises the question whether the
damage resulted from the breach of contract or duty. Accordingly, once
factual causation is established, it is necessary to ask whether the law is
prepared to attribute the damage to the particular breach, notwithstanding
the factual connection. Damage which is too remote is not recoverable even
13
if there is a factual link between the breach of contract or duty and the loss.
In relation to some types of torts (in particular negligence and nuisance) the
test for remoteness of damage is whether the kind of damage suffered was
reasonably foreseeable by the defendant at the time of the breach of duty.
b) Measure of damages:
The general underlying principle is that the party in breach is liable to pay
such monetary compensation as will place the injured party in the position it
would have enjoyed had the contract been performed. The rule as to measure
of damages in contract is, therefore, slightly different from the principle in
tort. In tort a tortfeasor is required to restore the party injured to the position
it enjoyed before the tort was committed.
It is worth noting that in assessment of damages, the general rule is that

damages are assessed as at the time of breach. The injured party must be
put in a position that he/or she would have in had the contract been
performed. The injured party must take all reasonable steps to mitigate his
or her losses.
Task 5: Describing the remedies other than damages in the carriage of

goods by sea
Introduction
The common law remedy of damages for breach of contract may, in
appropriate circumstances, be supplemented by the equitable remedies of
specific performance and injunction. While the common law action is
available as of right, the equitable remedies are discretionary and this fact
limits their usefulness in the context of charterparties and bill of lading
contracts.
A combination of three principles renders recourse to these remedies
inappropriate in the majority of cases. First, they can only be invoked where
damages provide an inadequate remedy for the consequences of the breach in
question.
Secondly, the courts will rarely grant specific performance of a contract for
the provision of services and, finally, they are reluctant to require specific
14
performance of a contract which would require constant supervision by the
court. While none of these factors might individually be decisive, the
combination of all three has the result that few, if any, contracts of carriage
are required to be specifically performed at the present day.
i) Specific performance: Decrees of specific performance are rarely

granted to enforce obligations arising under charterparties or bill of
lading contracts. Perhaps the decisive factor is that in the overwhelming
majority of cases alternative vessels or services are readily available with
the result that damages provide an adequate remedy. Only in a case
where the vessel or the services required possess some unique
characteristic fundamental to the particular contract might a decree of
specific performance be justified.
ii) Injunction: A similar approach has been adopted by the courts towards
an application for an injunction in the event of breach of a contract of
carriage. This is particularly true where the grant of an injunction would
be in substance equivalent to a decree of specific performance in that
the party in default would be left with no option but to perform the
contract.
16.2.03 DISPUTE SETTLEMENT UNDER THE LAW OF

CARRIAGE OF GOODS BY SEA

By the end of the sub-module unit, the trainee should be able to
a) explain the concept of disputes
b) describe the jurisdiction of the courts
c) explain choice of forum
d) explain choice of law
e) explain the concept of security for claims
f) discuss the mechanisms of disputes settlement
Introduction
Contracts of carriage by sea frequently involve an international dimension,
either because the parties involved are resident in different countries or
because performance of the contract is required in a State other than that in
which it was concluded. In the event of any dispute arising from such a
15
contract, problems may ensue as to the court in which proceedings can be
instituted and as to the appropriate law, which is applicable to the
transaction. Many of the standard bill of lading and charterparty forms make
express provision for such an eventuality by including clauses specifying a
particular forum (court) and choice of law. In the absence of such clauses
recognized as valid by the forum, both issues have to be decided by the
courts after a review of the circumstances of each individual case. This unit
is designed to highlight the various dispute resolution avenues available to
parties to contracts of carriage of goods by sea.
Task 1: Explaining the Concept of disputes
A dispute is a disagreement over the existence of a legal duty or right or over

the extent and kind of compensation that may be claimed by the injured
party for a breach of contract. There are numerous causes of dispute between
parties engaged in carriage of goods by sea some include disputes emanating
from cargo, ship etc. Most of which have been discussed in earlier units. Due
to the multi-jurisdictional nature of carriage of goods by sea, contracts of
carriage of goods by sea often involve an international dimension. This
situation arises because either the parties involved are resident in different
countries or because performance of the contract is required in a State other
than that in which it was concluded.
Task 2: Describing the jurisdiction of the courts
Most shipping law contract of carriage of goods by sea are based on the UK
law. Notwithstanding the above, internationals conventions such as The
Hague rules, Hague Visby rules, Hamburg rules and the Rotterdam rules
each provide jurisdiction clauses. In other circumstances, parties may agree
to prefer a jurisdiction of choice.
Kenya enacted the Carriage of Goods by Sea, laws of Kenya Cap 392 and
the scope of application under section 2 of the Act is as follows:-
16
“….Provisions of Schedule to apply
Subject to the provisions of this Act, the provisions of the Schedule to this
Act shall have effect in relation to and in connexion with the carriage of
goods by sea in ships carrying goods from any port in Kenya to any other
port whether in or outside Kenya……”.
Task 3: Explaining choice of forum in relation to dispute settlement
Parties to a contract of carriage may to some extent be permitted freedom of

choice in selecting a forum. This may well depend on the particular court to
which it is addressed and on the capacity in which that court is seized of the
dispute. Some of the considerations that court may have to make include to
what extent will the nominated court accept jurisdiction and to what extent
other courts will respect such a nomination by staying alternative actions
commenced within their own jurisdictions.
In general, the selected forum is more likely to accept jurisdiction than is

another forum to stay proceedings in deference to a choice of forum clause.
The force of any application for a stay will depend upon whether the forum
clause is exclusive or non-exclusive. Much may depend on the reasons for
the selection of a particular forum. Litigants invariably prefer to sue in their
own courts but where the parties originate from different jurisdictions, some
compromise is clearly necessary. Often the solution is to be found in
selecting a respected neutral forum with expertise in the relevant subject
matter
Task 4: Explaining choice of law in dispute settlement
Where the contract of carriage involves an international dimension, any

resulting cargo claim will inevitably raise issues as to the applicable law.
Where international contracts of carriage are involved it may be invaluable
to know in advance the national law which governs the agreement or any
part of it, since rights and remedies may differ radically in different legal
systems. For this reason it has long been customary in contracts of carriage
of goods by sea to include an express choice of law clause in order to pre-
empt any argument that may later arise. A variety of factors may influence
17
the parties in selecting a particular legal system, ranging from the stronger
bargaining power of one of the parties to the reputation of the system itself.
There is some support for the view that it is preferable for the choice of law
to follow the choice of forum since judges are presumably more competent
in interpreting their own legal system.
Task 5: Explaining the concept of security for claims
Even though the injured party is able to invoke jurisdiction and obtain
judgment in his favour from a competent court, the injured party remains
unsatisfied. In the period between judgment and execution, the defendant
may have become insolvent or he may have made use of the opportunity to
remove his assets out of the jurisdiction. Before embarking on arbitration or
litigation, therefore, the injured party would be well advised to seek some
form of interim security ( in advance in the form of an application under a
certificate) in order to ensure that any possible judgment in his favour at the
end of the suit will be met.
In Kenya under Section 4. of the Judicature Act, Cap 8, laws of Kenya, the
high court has been empowered to operate as an admiralty court for purposes
of maritime claims in Kenya. Section 4 reads as follows;-
“….High Court is court of admiralty

1) The High Court shall be a court of admiralty, and shall exercise
admiralty jurisdiction in all matters arising on the high seas, or in
territorial waters, or upon any lake or other navigable inland waters in
Kenya.
2) The admiralty jurisdiction of the High Court shall be exercisable—
a) over and in respect of the same persons, things and matters; and
b) in the same manner and to the same extent; and
c) in accordance with the same procedure, as in the High Court in
England, and shall be exercised in conformity with international laws
and the comity of nations.
3) In the exercise of its admiralty jurisdiction, the High Court may exercise
all the powers which it possesses for the purpose of its other civil
jurisdiction.
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4) An appeal shall lie from any judgment, order or decision of the High
Court in the exercise of its admiralty jurisdiction within the same time
and in the same manner as an appeal from a decree of the High Court
under Part VII of the Civil Procedure Act (Cap. 21)…….”
As such the interim security claims may be pursued through:
a) Instituting an action in rem: Kenya admiralty jurisdiction is

substantively based on the English admiralty jurisdiction law contained in
the UK Supreme Court Act 1981 which, in respect of carriage claims,
confers jurisdiction in rem on the Admiralty Court following the service
of an in rem claim form within territorial waters on the ship in connection
with which the claim arises. Such jurisdiction is established where two
requirements are met. First, the person who would be liable on the claim
if sued in personam (‘the relevant person’) was, at the time the cause of
the action arose, the owner or charterer of the ship or in possession or
control of it. Secondly, at the time the action is brought, the ship is either
beneficially owned (‘as respects all the shares in it’) or chartered by
demise to that person. Alternatively, a claim form may be served and a
claim made against any other ship, which, at the time the action is
brought, is beneficially owned by the ‘relevant person’. Such a remedy is
available for most claims arising under a contract of carriage by sea.
Jurisdiction in rem is exercisable over foreign as well as Kenyan ships,
provided that they are located in Kenyan territorial waters at the time of
service of the claim form. Example of case; East African Power
Management Limited v Owners of the Vessel “Victoria Eight” [2005]
eKLR
b) Freezing injunction: This form of security was given statutory
recognition by the Supreme Court Act 1981. It takes the form of an
interlocutory injunction which can be made at any time before judgment,
restraining a party from disposing off or dealing with his assets. The usual
purpose of the freezing order is to preserve the defendant’s assets until
judgment can be enforced. It is a discretionary equitable remedy, failure
to comply with amounts to contempt of court.
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Task 6: Explaining mechanisms of disputes settlement
Parties to a dispute may opt to take different forms of dispute resolution

mechanisms to resolve dispute. The most common dispute resolution
mechanisms are:
i) Judicial proceedings – are those actions that take place in Court, such as
a breach of contract suit or other civil actions.
ii) Alternative dispute resolution mechanism – is the procedure for settling
disputes without litigation such as arbitration, mediation and negotiations.
It is important to note that Alternative dispute resolutions are less
costly and more expeditious. The most common alternative dispute
resolution mechanism used by parties to contracts of carriage of goods
by sea is arbitration as the same is incorporated in most contracts of
carriage of goods by sea, whether charterparties or bills of lading.
16.2.04 FREIGHT

a) explain meaning of freight
b) explain types of freight
c) discuss the basic obligation to pay freight
d) describe freight payment methods
Introduction
Without freight there would be no merchant shipping and subsequently, no
need for bills of lading. The carrier’s right to freight is a fundamental aspect
of carriage of goods by sea. This chapter covers the subject of freight due
under a bill of lading as opposed to charterparty freight. However, the
majority of disputes over “bills of lading” freight arise in cases where one or
more charterparties are also in place and thus this chapter cannot ignore
altogether the law relevant to charterparties.
20
Task 1: Explaining meaning of freight
There are different meanings attached to the term freight -

1. Freight is the consideration payable to the carrier for the carriage of
goods from the port of shipment to the agreed destination.
2. The term ‘Freight’ can also be used to refer to cargo being carried (sea-
freight/airfreight).
Task 2: Explaining types of freight
The following are types of freight:

a) Advance freight: The parties to a contract of carriage of goods by sea
may expressly provide that the whole or part of the freight shall be
payable in advance. Such a practice is frequently encountered in the liner
trade and in many voyage charters and is a common requirement in
transactions involving documentary credits. There is, however, a strong
presumption at common law that freight is only payable on delivery of
the goods at destination and so any provision for advance payment must
be clearly expressed. The precise time at which freight is payable in
advance may be expressed in a variety of ways such as ‘on signing bills
of lading’, ‘on sailing of vessel’ or within a specified period following
the occurrence of such an event. Freight is then due at the time indicated
and, if not paid, will remain due even though the goods are lost in transit
and never reach their destination. On the other hand, should the cargo be
lost or the contract be otherwise frustrated before the time fixed for
payment, then the obligation to pay freight will be discharged. Once
freight has been paid in advance, it is not recoverable by the shipper
even if the cargo is subsequently lost during the voyage, provided that
such loss is covered by an exception in the relevant charterparty or bill
of lading. This appears to be the position at common law but this is
frequently reinforced by an express clause in the contract of carriage to
the effect
b) Lumpsum freight: Freight may take the form of an agreed amount for
the use of the whole, or part, of a ship to carry cargo on a given voyage
instead of being calculated on the basis of the weight or measurement of
cargo shipped. Such a lump sum may still be recoverable in full even
21
where the vessel fails to load the agreed amount of cargo provided that
the failure is not due to any fault on the part of the shipowner as, for
example, where it results from the shipper’s failure to provide an
adequate amount of cargo. Lump sum freight is presumed to be payable
on safe delivery of the cargo at the port of discharge.
c) Dead freight: Where the charterer has failed in his obligation to load the
full amount of cargo required under the terms of the charter, the
shipowner is entitled to damages for breach of contract – otherwise
known as ‘dead freight.’
d) Back freight: Where a carrier is prevented from delivering the cargo at
the agreed destination for some reason beyond his control, such as the
outbreak of war or the failure of the cargo owner to take delivery, then
he must deal with the cargo in the owner’s interest and at the owner’s
expense. If he is unable to obtain instructions from the cargo owner, he
may land and warehouse the goods, transship them, carry them on to
another port or return them to the loading port – whichever action is the
most appropriate in the circumstances. He is then entitled to recover the
expenses involved as ‘back freight’.
e) Pro-rata freight: The general rule at common law is that, in the absence
of agreement to the contrary, no freight is payable unless the cargo is
delivered at the agreed destination. Even though the carrier is excused
from carrying the goods to the port of discharge by the intervention of an
excepted peril, he is not entitled to claim freight proportional to the
amount of the voyage completed.
Task 3: Explaining basic obligation to pay freight
The obligation to pay freight can arise either under a voyage charter or a bill
of lading contract. Freight is paid in respect of the carriage of goods from
one place to another. In the absence of agreement to the contrary, the
common law presumes that freight is payable only on delivery of the goods
to the consignee at the port of discharge. Payment of freight and delivery of
goods are said to be concurrent conditions, in other words the carrier cannot
demand payment of freight unless he is willing and able to deliver the goods
at the place agreed. The true test of the right to freight is the question
whether the service in respect of which the freight was contracted to be paid
22
has been substantially performed, and, as a rule, freight is earned by the
carriage and arrival of the goods ready to be delivered to the merchant. On
the other hand, if goods are to be delivered by installments, the consignee
must, if required, pay for each delivery made and is not entitled to withhold
payment until all the goods are delivered.
The contract of carriage of goods by sea is said to be entire and indivisible,

with the result that no freight is payable unless the cargo reaches the agreed
destination. It is immaterial that the failure to do so is in no way attributable
to the carrier. It is also irrelevant that the occurrence which prevented
performance is covered by an exception since an exception is intended to
protect the carrier against an action for non-delivery of cargo and not to
entitle him to freight which has not been earned. From the cargo owner’s
standpoint, he has undertaken to pay freight as a quid pro quo for the safe
delivery of his goods at the agreed destination. The only case where full
freight becomes payable in such circumstances is where failure to reach the
port of discharge is solely due to some act or default on the part of the cargo
owner. The carrier can, however, protect himself against such an eventuality
in one of three ways. He can insure against such a loss of freight, he can
stipulate for some proportion of the freight to be paid in advance, or he can
transship the goods and claim the full freight when they arrive at their
destination.
Task 4: Explaining freight payment methods
The shipper may pay freight due to the ship-owner through the following
methods:
a) Freight collect: This denotes an agreement that freight will be paid at
the port of destination. Sometimes the shipper and the carrier might
have an agreement that payment of freight is to be done at port of
destination. This could be as a result of the contract of sale that payment
is to be done at port of destination. Therefore bill of lading would be
claused ‘freight to collect’.
b) Prepaid freight: this denotes paid in advance of shipment of the cargo
to the port of destination. Usually the shipping line expect the freight to
23
be prepaid in order to avoid delay in the delivery of cargo at port of
discharge. Therefore the bill of lading is claused ‘freight prepaid’.
16.2.05 TORTIOUS LIABILITY

a) explain tortious liability in shipping
b) describe types of tortious liability in shipping
Introduction
Maritime law torts is a term covering cases where injury, loss or damage is
caused to a person or their interests by another party’s action or negligence.
The word “tort" derives from a Latinate Middle English word meaning
“injury". In this light, maritime tort applies to cases where injury, loss or
damage is caused to a person or their interests in a maritime setting. This
gives maritime tort law a very broad range of coverage, particularly as no
malice or premeditation is required to designate liability under the tenets of
tort law.
Where a claim for loss or damage is based on the negligence of the carrier or
his servants, an alternative to the contractual remedy might be to sue the
party responsible for the loss in tort. There would be little advantage to a bill
of lading holder in pursuing such an action against the contractual carrier,
but there are a number of other situations where a tortious action might
provide an effective remedy.
In combined transport, performance of individual legs is frequently sub-

contracted by the combined transport operator (CTO) to independent
carriers. In such an event there is no contractual relationship between the
cargo owner and the actual carrier, the latter having concluded a unimodal
contract with the CTO and being presumably bound by any relevant
unimodal convention. There is, therefore, nothing to prevent the cargo owner
from suing the actual carrier in negligence and thus circumventing any
limitation clause in his contract with the CTO. On the one hand, the
introduction of a Himalaya clause into a bill of lading is designed to extend
24
to servants, agents or independent contractors all the protection afforded to
the carrier by the terms of the contract of carriage. Where such clause does
not exist in the contract of carriage of goods by sea the shipper can enforce
his rights by bringing a tort claim against the shipowner. This is the basis of
tortious liability under the law of carriage of goods by sea.
Task 1: Explaining tortious liability in shipping
A tort is a legal term describing a violation where one person causes damage,
injury, or harm to another person. The violation may result from intentional
actions, a breach of duty as in negligence, or due to a violation of
statutes. The party that commits the tort is called the tortfeasor. A tortfeasor
incurs tort liability, meaning that they will have to reimburse the victim for
the harm that they caused them. In other words, the tortfeasor who is found
to be “liable” or responsible for a person’s injuries will likely be required to
pay damages. Under most tort laws, the injury suffered by the injured party
does not have to be physical. A tortfeasor may be required to pay damages
for other types of harm.
Task 2: Describing types of tortious liability related to shipping
The following are types of tortious liability related to shipping

a) Strict liability - Strict liability means that the tortfeasor may be held
liable for a violation even if they did not intend to violate a statute. For
instance, if a ship spills oil at sea, the liability is based on the fact that the
oil has been spilled at sea and not whether the shipowner had the
intention to do so.
b) Fault-based liability – this is where a person’s act or omission that

causes loss, injury or damages to another is committed with intent to
cause such loss, injury or damage, or recklessly and with knowledge that
such loss, injury or damage would probably result.
c) Vicarious liability - This is where a carrier is held liable for the actions
of his servants.
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16.2.06 INTERNATIONAL CONVENTIONS APPLICABLE TO
THE CARRIAGE OF GOODS BY SEA

a) identify the main international conventions applicable to carriage of
goods by sea
b) explain the application of the international conventions relating to the
carriage of goods by sea
Task 1: Identifying the main international conventions applicable to

carriage of goods by sea
International conventions governing carriage of goods by sea are as follows:-

International Convention for the Unification of Certain Rules of Law relating
to Bills of Lading ("Hague Rules"), 1924
International Convention for the Unification of Certain Rules of Law
Relating to Bills of Lading (Hague-Visby-Rules 1968 (Hague-Visby-Rules
1968)
United Nations Convention on the Carriage of Goods by Sea ("Hamburg
Rules"), 1978;
United Nations Convention on Contracts for the International Carriage of
Goods Wholly or Partly by Sea (The Rotterdam Rules), 2009:
United Nations Convention on Multimodal Transport Convention
(“Multimodal Convention”), 1980
Task 2: Explaining the application of the international conventions

relating to the carriage of goods by sea
a) Geographical application
It is worth noting that this has already been provided under the scope of
carriage of goods by sea under section 16.2.01T para (d).
26
b) Exclusions on scope of application
Hague rules - Article 1 (c) of the Hague Rules excludes liability in terms of
carriage of goods as deck cargo. Thus, deck cargo is excluded and the carrier
can claim exemption from liability.
Hague –Visby rules - Article 1(b), apply only to contracts of carriage

“covered” by a bill of lading or similar document of title and therefore they
impliedly exclude charter parties.
This provision gives rise to some uncertainty, for article 3(3) provides that
the carrier must issue a bill of lading on demand of the shipper and article 6
grants the carrier freedom of contract when no bill of lading is issued.
Therefore, the Rules apply also before a bill of lading is issued.
Hamburg rules –Article1(6) provide for their application to contracts of

carriage by sea, thereby adopting a contractual approach, but then state that
they do not apply to charter parties, thereby using a documentary approach in
order to exclude from their scope of application contracts for which the basic
document is the charter party.
Rotterdam rules – Article 6 sets out cases where in liner transportation the
Rules do not apply, such cases being identified by reference to documents
(charterparties and other contractual arrangements). In other instances there
are cases where in non-liner transportation the Rules instead do apply: it
appears, therefore, that such provisions imply that as a general rule, the
Rules apply to liner transport, in respect of which the contract is contained in
or evidenced by a transport document, and do not apply to non-liner
transport in respect of which normally the contract is evidenced by a
charterparty.
The most significant feature of the provisions on the scope of application is

the protection granted to third parties: under the Hague-Visby and the
Hamburg Rules such protection is granted only if a bill of lading is issued
and is endorsed to a third party; under the Rotterdam Rules instead in all
situations excluded from their scope of application the Rules nevertheless
apply in respect of parties other than the original contracting party,
irrespective of a negotiable transport document (such as a bill of lading) or a
27
negotiable electronic transport record being issued or not, as well as
irrespective of any document being issued or not.
c) Period of application and period of responsibility of the carrier

International Convention for the Unification of Certain Rules of Law
relating to Bills of Lading ("Hague Rules"), 1924 and the International
Convention for the Unification of Certain Rules of Law Relating to Bills of
Lading (Hague-Visby-Rules 1968): Article 1 (e) of the Hague Visby Rules
provides that “Carriage of goods” covers the period from the time when the
goods are loaded on to the time they are discharged from the ship also known
as tackle to tackle period.
United Nations Convention on the Carriage of Goods by Sea (Hamburg

Rules 1978): article 4 para 1 of the Hamburg Rules provides that the
responsibility of the carrier of the goods covers the period during which the
carrier is in charge of the goods at the port of loading, during the carriage
and at the port of discharge. Some of the notable challenges include the
before and after problem.
United Nations Convention on Contracts for the International Carriage of

Goods Wholly or Partly by Sea (The Rotterdam Rules, 2009): article XII
para 1 provides that the period of responsibility of the carrier begins when the
carrier or a performing party receives the goods for carriage and ends when
the goods are delivered (door to door principle).
16.2.07 THE BILL OF LADING

a) explain the meaning of a bill of lading
b) describe the salient features of a bill of lading
c) describe the main types of bill of lading
d) explain the functions of a bill of lading
e) discuss the legal implications of a bill of lading
28
Task 1: Explaining the meaning of a bill of lading
A bill of lading is a legal document between the shipper of goods and the
carrier detailing the type, quantity and destination of the goods being carried.
Once the cargo is loaded, a bill of lading will be issued which will act, not
only as a receipt for the cargo shipped, but also as prima facie evidence of
contract of carriage and a document of title. It must be signed by, or on
behalf of a carrier by sea.
Origins of the bill of lading:

It is safe to say that in the eleventh century the bill of lading was unknown. It
was at this time that trade between the ports of the Mediterranean began to
grow significantly. Some record of the goods shipped was required, and the
most natural way of meeting this need was by means of a ship’s register,
compiled by the ship’s mate. Although use of such a register probably began
informally, it was soon, in some ports at least, placed upon a statutory
footing.
Its accuracy was paramount and, around 1350, a “statute was enacted, which
provided that if the register had been in the possession of anyone but the
clerk, nothing that it contained should be believed, and that if the clerk stated
false matters therein he should lose his right hand, be marked on the forehead
with a branding iron, and all his goods be confiscated, whether the entry was
made by him or by another”. By the fourteenth century, what was later to be
accomplished by the receipt function of the bill of lading was being
accomplished by an on-board record. As yet there was no separate record of
the goods loaded as it seems that shippers still travelled with their goods and
there was accordingly no need for one.
This only changed when trading practices altered and merchants sent goods
to their correspondents at the port of destination, informing them by letters of
advice of the cargo shipped and how to deal with it. Merchants also began to
require from the carrier, and to send to their correspondents, copies of the
ship’s register.
There is nothing to suggest that it was ever envisaged or intended that the
document would at any point be transferred. They provide that delivery is to
29
be made to a particular person, the correspondent of the shipper, and, in the
case of the document quoted above where there was a change in the
consignee, it is clear from the facsimile that the final consignee was provided
for before the bill was issued and was not a later endorsement thereon.
It is impossible to say when exactly the practice of registering the cargo in

the ship’s book was superseded by the issuing of bills of lading, but it is
likely that practice differed between ports. All that can safely be said is that
rudimentary bills of lading were in existence in the late fourteenth century
and that it was not contemplated that they would be transferred. They clearly
served some sort of receipt function, but it does not, therefore, follow that
possession of document entitled the possessor to the delivery of the cargo.
It can be concluded that the bill of lading of the fourteenth century was
purely a receipt. During the sixteenth and seventeenth centuries, when it
ceased to be possible to enter a charter party with every shipper, some bills
were issued that contained the contract of carriage, although these do not
seem to have been prevalent. Further, during this period, bills came to
represent the holder’s entitlement to delivery of the goods by virtue of the
custom of merchants.
The modern history of the bill of lading begins at the end of the eighteenth
century with the landmark case in Lickbarrow v Mason.
In 1786, Turing & Sons shipped goods from Middlebourg in the province of
Zealand aboard the Endeavour destined for Liverpool. The goods were
shipped by the direction and to the account of Freeman. Holmes, the master
of the ship, signed four copies of the bill of lading in the usual form. By
these the goods were made deliverable “unto order or assigns”. The master
retained one of the bills, two were indorsed by Turing & Sons in blank and
sent to Freeman, the final one being retained by Turing themselves. Three
days after the shipment Turing drew four bills of exchange on Freeman for
the price of the goods. These were duly accepted by Freeman. Freeman sent
the bills of lading to the plaintiff so that he might sell the goods on
Freeman’s behalf, but, as was common at the time, although the plaintiff was
ostensibly a factor for sale, Freeman drew bills upon the plaintiff for a total
sum in excess of the value of the cargo. The plaintiff accepted the bills and
paid them. Freeman, however, became bankrupt before the bills drawn by
30
Turing became due. They were accordingly unpaid vendors and sought to
stop the goods in transit by sending the bill of lading that they had retained to
their agent, the defendant, and instructing him to take possession of the
goods on their behalf. This the defendant did, and the plaintiff successfully
sued them in trover.
At first instance, Buller J. held that the bill of lading passed the property in
the goods to the transferee. The court relied upon the following cases in its
decision, Wiseman v Vandeputt, Evans v Martell and Wright v Campbell.
By the nineteenth century the bill of lading developed its most important
feature, its ability to give the holder symbolic possession of the goods. This
development took place in the first half of the nineteenth century. To date,
the bill of lading retains these three characteristics.
Task 2: Describing the salient features of a bill of lading
Features of a bill of lading include the following:-

a) It is an evidence of contract.
b) It serve as a document of title-to-goods.
c) It may be marked freight paid or freight forward.
d) A clean bill states that packing of goods are free from defects.
e) A foul bill states that the packing is defective
A bill of lading contains the following particulars:-

i) Shipper: a person who enters a contract with a carrier, is the exporter of
the cargo and his name appears on top of the bill of lading
ii) Vessel: This is the name of the vessel on which cargo has been loaded
for shipment
iii) Port of loading : this the port of the export country where cargo is
loaded on board the ship
iv) Port of discharge: this is the port where the cargo will be delivered to
the consignee of cargo. It is the port of destination
v) Voyage number: to identify the specific voyage of the ship.
vi) Place of delivery: the final place of delivery of the cargo, especially
when the carrier has to perform more than one mode
31
vii) Cargo description: it indicates the number of packages, weight, volume
and measurements
viii) Freight status: shows whether it is freight pre-paid or freight to collect
ix) Place of issue: the origin place of issue of cargo at country of origin
x) Masters signature: the signature that cargo has been duly shipped on
board a vessel
xi) Consignee: this is the receiver of cargo at port of discharge or receipt
indicated in the bill of lading
xii) Notify party: this is the person/company who is notified in case the
consignee is not easily accessible.
xiii) Terms and conditions of the contract
Task 3: Explaining the main types of bill of lading
Bills of lading are classified into different forms depending on their purpose
and negotiability. Generally, bill of lading is either negotiable or non-
negotiable. The main difference between the two types is title (ownership) of
the one can be transferred to another party while the other is consigned to a
named party and hence he/she has to be the final recipient of the cargo as the
title of this type of bill of ladings cannot be transferred.
Bills of lading have been classified into different types, which include the
following:
a) Bearer bill: A bearer bill requires the carrier to deliver the goods to the
bearer (or holder) of the bill without the requirement that the bearer is a
named consignee or endorsee. A bearer bill is a document of title and it
may be converted to another type of bill by endorsement by the holder.
b) Order bill: An order bill is one where the consignee is described either
as ‘to order’ or ‘x or order’. An order bill is the classic form of a bill of
lading.
c) Straight consigned bills: Is a common modern form of document where
the consignee is a named party but without any reference to ‘to order’.
This evidence is a contractual obligation on the carrier to deliver goods to
the named party only. It is non-negotiable.
32
d) Shipped bill: The bill indicates that the goods have been loaded on
board, or shipped on a named vessel. It is distinct from received for
shipment bill. .
e) Received for shipment bill: The bill generally indicates that the goods
/cargo has been received for shipment but has not been loaded onto a
vessel.
f) Freight prepaid bills: For commercial reasons a sale contract frequently
specifies that bills shall be marked ‘freight prepaid’. Where the sale is on
CIF terms, the buyer wants an assurance that the freight has been paid by
the seller who will usually be the shipper of the goods. Therefore the
buyer under the CIF wants the assurance that the carrier will not seek to
recover freight from the buyer or exercise a lien on the goods or the
discharge port as an aid to recovering unpaid freight.
g) Through bill: A though bill is used where the main carrier undertakes to
perform a portion of the carriage, and also undertakes to arrange as agent
an additional leg for example acting as forwarding agent for the onwards
road carriage from discharge port. This is distinct from through and
combined .transport bills.
h) Combined transport bill: commonly used on multimodal transport. A
combined transport bill is a contract between C, the cargo owner, and S,
the carrier whereby S agrees to carry or procure carriage of the goods, as
principal, from A to B, even if the journey from A to B involves a series
of stages of sea carriage and other means of carriage such as road, rail or
air carriage. S will typically sub-contract some or all of carriage to others
but as far as C is concerned S is, the “one-stop-shop” with whom he
contracts.
Task 4: Explaining the functions of a bill of lading
The bill of lading under the hands of the bill of lading holder/cargo holder is
said to have three main functions this being:
- evidence of a contract of carriage
- prima facie evidence of receipt of goods; and,
- document of title (ownership of goods).
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Each of these functions will be briefly discussed hereunder:
a) Receipt for goods shipped:

Originally the bill of lading was a mere bailment receipt which was required
to obtain delivery of the goods at the port of discharge. It would normally
include statements as to the quantity and description of the goods shipped
together with the condition of the goods.. Where goods have been loaded on
board a vessel and signed bill of lading handed by the master to the shipper,
such bill of lading begins its existence in a role of master’s receipt for
shipper’s goods. The bill of lading is always dated, this reflects the day of
completion of loading and the moment when the goods were shipped. The
bill of lading contains pertinent particulars including the name of the vessel,
the port of shipment and the port of delivery.
This primary function has been enumerated clearly in Art. III, r. 3 of the
Hague Rules or Hague-Visby Rules or, perhaps more clearly, Art. 14 of the
Hamburg Rules.
b) Evidence of contract of carriage:

The contract of carriage is normally concluded orally long before the bill of
lading is issued. A bill of lading is not, in itself, the contract between the
shipowner and the shipper of goods, though it has been said to be excellent
evidence of its terms. The contract has come into existence before the bill of
lading is signed. The bill of lading on the other hand is issued after the goods
have been put on board. The bill of lading is therefore not the contract in this
instance but evidence of the terms of contract of carriage.
c) Document of title:
The bill of lading is invested with particular attributes of great practical
importance commercially. This enables it to become one of the key
instruments in international trade. The bill of lading is often referred to as a
negotiable document of title, and there is some confusion as to whether the
bill of lading is a negotiable or is merely a transferable document. This is the
case in English law.
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The bill of lading as a document of title can have several functions:
i) the bill of lading represents the goods so that possession of a bill of
lading is equivalent to possession of the goods;
ii) under certain conditions, the transfer of the bill of lading may have the
effect of transferring the property of the goods; and,
iii) the lawful holder of a bill of lading is entitled to sue the carrier.
Task 5: Discussing the legal implications of a bill of lading
In addition to the express clauses agreed by the parties, every contract of

carriage of goods by sea is negotiated against a background of custom and
commercial usage from which a series of obligations are implied which are
automatically incorporated into the contract in the absence of agreement to
the contrary. Since such obligations are derived from a common source in
the law merchant, a similar result follows at common law irrespective of
whether the terms of the contract are enshrined in a charter party or
evidenced by a bill of lading. In this unit, each of these implied obligations
will be considered separately.
Obligations of the carrier
a) The undertaking as to seaworthiness:

The carrier is duty bound before and at the beginning of the voyage to
exercise due diligence to provide a seaworthy ship, which is properly
manned, equipped and cargo worthy. The carrier has the burden of proving
that he exercised due diligence or that he ought to be exempt under the
exempted perils or that the loss occurred without fault or neglect on this part
or his servants.
b) Care of cargo
The carrier is obligated to properly care for the cargo during the period of the
contract of carriage.
c) Obligation of reasonable dispatch:

The carrier is required to perform his contractual obligations with
reasonable dispatch. Performance of this obligation is judged, not on a
strictly objective basis, but in relation to what can reasonably be expected
35
from the shipowner under the actual circumstances existing at the time of
performance. When the language of the contract does not expressly, or by
necessary implication, fix any time for the performance of a contractual
obligation, the law implied that it should be performed within a reasonable
time.
d) Obligation on bill of lading

The carrier should make specific annotations on the bill of lading upon
receipt of goods. The carrier is not bound to acknowledge contrary facts if he
has reasonable grounds for suspecting the information supplied by the
shipper to be inaccurate, or if he has no reasonable means of checking goods
already sealed in a container
e) Obligation not to deviate from the agreed route:

The owner of a vessel, whether operating a liner service or under charter,
impliedly undertakes that his vessel, while performing its obligations under
the contract of carriage, will not deviate from the contract of carriage voyage
unless such deviation is justifiable and reasonable.
f) Obligation to nominate a safe port:

Whenever a charterer has the right to nominate a port, whether under a time
or voyage charter, the question arises as to whether he is under a
corresponding obligation to nominate a safe port. The right to nominate may
take one of two distinct forms. On the one hand, the charterer may be given
the right to nominate from a range of ports listed in the charter, e.g.
Sydney/Melbourne/Brisbane. In this case no implied warranty of safety will
arise on nomination since the owner, having agreed to the port being
identified in the charter, may reasonably be assumed to have accepted any
risk as to its safety. Alternatively, the charterer may be given the right to
nominate from a number of unnamed ports within a specific range, e.g.
Ghana/Nigeria. Here a distinction has to be drawn between a time charter
and a voyage charter. In the case of a time charter, where the owner has
placed the commercial use of his vessel at the disposal of the charterer, a
warranty as to the safety of any nominated port will invariably be implied.
The position with regard to the voyage charter is, however, less
straightforward. In the absence of clear authority, where a voyage charterer
has the right to nominate from a range of unnamed ports, the implication of
36
such a warranty is not automatic but depends on the specific terms of the
particular charter and on whether the implication is necessary to give
business efficacy to the contract.
Obligations of the shipper
a) Obligation not to ship dangerous goods:

The shipper will not ship dangerous goods without the consent of the carrier.
In the event that this takes place the shipper will indemnify the carrier and as
such become liable for any loss or damage for their shipment.
b) Obligation to pay freight:

Freight is the consideration payable to the carrier for the carriage of goods
from the port of shipment to the agreed destination. In the absence of
agreement to the contrary, the common law presumes that freight is payable
only on delivery of the goods to the consignee at the port of discharge.
16.2.08 SEAWAY BILL

a) explain the meaning of a seaway bill
b) explain the salient features of a seaway bill
c) explain the functions of a seaway bill
d) discuss the legal implications of a seaway bill
e) describe the laws governing a seaway bill
Task 1: Explaining the meaning of a seaway bill
Definition of a seaway bill

A transport document for maritime shipment which serves as evidence of the
contract of carriage and as a receipt for the goods, but is not a document of
title.
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Issuance of a seaway bill
A Sea Waybill is a transport contract (contract of carriage) the same as a Bill
of Lading. A Sea Waybill, however, is not needed for cargo delivery and is
only issued as a cargo receipt. It can either be issued in hard copy format or
soft copy format. A Sea Waybill is not negotiable and cannot be assigned to
a third party.
In a seaway bill, the consignee at destination need not produce a copy of

seaway bill duly endorsed by him to the carrier to deliver goods. The carrier
can deliver goods to the consignee by identifying and confirming as the
claimer is the consignee mentioned in the documents. In other words, in a
seaway bill, the responsibility for identifying the consignee is vested with the
carrier.
A Seaway Bill of Lading is usually issued:

a) when the shipper and consignee are part of the same business group and
there are no negotiations required between the two either directly or via
bank for release of the cargo
b) the shipment doesn’t involve any bank and the shipper doesn’t really
need to submit original bill of lading to secure his payment
c) when the shipper doesn’t have the time to print the original bills and
courier the same to the consignee
d) the shipper is a freight forwarder and he wants to issue a house bill of
lading to his customers
Distinguishing a sea waybill from a bill of lading

The Bill of Lading is a document similar to the Sea Waybill used in carriage
of goods by sea and their main difference includes the following:-
a) that bills of lading are negotiable instruments while the seaway bill is
not negotiable;
b) that bills of lading can be used as a guarantee, to obtain a loan or credit
from a bank, since the document is a title, whereas banks do not
recognize sea waybills similarly;
c) that seawaybills of Lading cannot be consigned to order of someone
else. It has to be consigned to a direct customer only whereas under bills
of lading it can be consigned to order;
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d) that in bills of lading the shipper will either send the Original Bill of
Lading to the importer or usually hold it until payment has been made.
Upon the shipper’s authorization to release goods, the Original Bill of
Lading will be sent to the importer in which they can surrender to the
freight forwarding company to secure the release for sea freight
shipment. In the instance of a seaway bill, there is no requirement for the
presentation of the original document for the goods to be released upon
arriving at the destination;
Salient features of a seaway bill
The seaway bill has the following salient features:

a) Sea way bill may be issued by the carrier at the time of loading cargo;
b) It is non- negotiable and as such cannot be used as collateral;
c) It does not need to be presented to the carrier for the release of cargo;
d) It can be used electronically or hard copy and it contains the following
information:
i) Shipper: a person who enters a contract with a carrier, is the
exporter of the cargo and his name appears on top of the bill of
lading
ii) Vessel: this is the name of the vessel on which cargo has been
loaded for shipment
iii) Port of loading : this the port of country of export where cargo is
loaded on board the ship
iv) Port of discharge: this is the port of the consignee of cargo, in this
port the carrier discharge cargo. It is the port of destination
v) Voyage number: to identify the specific voyage of the ship.
vi) Place of delivery: the final place of delivery of the cargo,
especially when the carrier has to perform more than one mode
vii) Cargo description: it indicates the number of packages, weight,
volume and measurements
viii) Freight status: shows whether it is freight pre-paid or freight to
collect
ix) Place of issue: the origin place of issue of cargo at country of
origin
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x) Masters signature: the signature that cargo has been duly shipped
on board
xi) Consignee: this is the receiver of cargo at port of discharge or
receipt indicated in the bill of lading
xii) Notify party: this is the person/company who is notified incase the
consignee is not easily accessible
- Evidence that the carrier has received the goods
- Evidence of a contract of sea carriage
- Promise to deliver the goods at their destination
- The presentation of the original document is not a pre-condition
for delivery
- Seaway bill contains an undertaking by the carrier to deliver the
goods to the consignee named in the document
Task 3: Explaining the functions of a seaway bill:
i) Receipt of goods shipped:

A seaway bill also acts as a receipt of goods shipped, which is required by
the consignee to obtain delivery of the goods from the carrier at the port of
discharge. Even when used in this capacity it would normally include
statements as to the quantity and description of the goods shipped together
with the condition in which the carrier received them. Such representations
of fact had important commercial effects. Most importantly, they form the
basis of any cargo claim by the receiver should the goods be short delivered
or damaged on discharge.
ii) Evidence of contract of carriage:

The seaway bill is prima facie evidence that cargo was received by carrier
for shipment or shipped on board a vessel. For this reason, the sea waybill
lends itself well to contemporary international maritime commerce where
negotiability of the transport document is not required by the parties to the
contract of sale or by the banks involved in financing the purchase through
documentary credits.
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Task 4: Explaining the legal implications of a seaway bill
The sea waybill has appeared as a substitute for the bill of lading and, despite
its nature as a non-negotiable document, it can be employed in a manner
which allows it to provide collateral security to banks. While the use of non-
negotiable sea waybills has many advantages the lack of negotiability has
cast doubts on the ability of sea waybills to provide banks, financing
international sales contracts, with acceptable collateral security. This
problem has been overcome by naming the bank as consignee on the sea
waybill and introducing special clauses ensuring the bank's control over the
goods. Sea waybills, like bills of lading, constitute a receipt and provide
evidence of the contract of carriage, its terms being incorporated by
reference. In contrast to bills of lading, sea waybills are not negotiable
documents of title representing the goods. The right to control the goods in
transit and the right to claim their delivery at the port of destination are
independent of the sea waybill. The sea waybill is simply a non-negotiable
receipt which a consignee does not need to present to obtain delivery of the
goods.
Task 5: Describing Laws governing a seaway bill:
The Comite Maritime International (CMI) Uniform Rules of Seaway

bill: Recognizing that neither The Hague / Hague Visby conventions are
applicable to seaway bill, CMI recently formulated new set of rules that can
be voluntarily incorporated into any other contract of carriage covered by the
seaway bill. The rules provide that a contract of carriage covered by a
seaway bill shall be governed either by CMI rule itself, or whichever
international convention or national law.
Noting that the sea way bill of lading is no document of title, the Carriage of
Goods by Sea Act Cap 392, laws of Kenya makes reference to the
applicability of the law in terms of bill of lading or document of title.
However the UK under the Carriage of Goods by Sea Act, Cap 50 takes
cognizance of the sea way bill and its use.
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16.2.09 CHARTERPARTY

a) explain the meaning of charterparty
b) describe types of charterparty
c) describe the salient features of different types of charterparties
d) explain functions of charterparty
Introduction
A charter party agreement is a document recording an agreement between a
ship owner and someone who rents all or part of the ship for a particular
voyage or period of time.
Task 1: Explaining the meaning of Charterparty
When the agreement for carriage of goods by sea is for the employment of
the whole ship on a given voyage or voyages or for a given period of time,
the contract of carriage of goods by sea is contained in a document called a
charterparty. The person who has hired the whole or part of the ship is
entitled to use the ship and is called the charterer and the ship is said to be
chartered or under a charter.
The charter party embodies the terms upon which the shipowner lends the
use of the ship, and contains stipulations as to the rate of remuneration, the
nature of the voyage, the time and mode of employing the vessel. Chartering
of a vessel is a maritime term used to describe hiring or renting a vessel
especially for bulk cargo.
Task 2: Describing types of Charterparty
There are essentially three types of charter party, depending on whether the
vessel is chartered completely or in part for a period of time or for one or
more voyages. In some instances the shipowner retains control of equipping
and managing the vessel and agrees to provide a carrying service.
a) Voyage charterparty: legal contract is entered which is signed by the
shipowner and the charterer defining the roles and responsibilities of the
42
shipowner and the charterer during the particular voyage.. This type of
charter carries particular cargo in a particular ship for a particular voyage
(pre-determined route) for an agreed sum. A typical example of a
voyage charter is provided by a seller of goods under a c.i.f. contract
who, having agreed to ship the goods to the buyer, then charters a vessel
to carry them to their destination.
b) Time charter party: legal contract is entered which is signed between
the shipowner and the charterer defining the roles and responsibilities of
the shipowner and the charter for a specified period. A time charter is
used by carriers who wish to augment their fleet for a particular period
without the expense of buying or running the vessel. This is generally
hiring of a vessel for a time period.
c) Demise/Bareboat Charter party: it operates as a lease of the vessel and
not as a contract of carriage. It differs from other charterparties in much
the same way as a contract to hire a self-drive car differs from a contract
to engage the services of a taxi. Whereas in an ordinary voyage or time
charter the shipowner retains control over the operation of the vessel,
under a demise charter the charterer displaces the owner and, for the
period of the ‘lease’, takes possession and complete control of the ship.
Under this type of contract, the charterer procures and equips the vessel
and assumes all responsibility for its navigation and management. For all
practical purposes he acts as owner for the duration of the charter and is
responsible for all expenses incurred in the operation of the vessel.
Task 3: Describing the salient features of charterparties
Voyage Charter party: There is a variety of standard voyage charter forms

tailored for different trading routes and the carriage of different cargoes.
Parties to this type of charter are also able to construct their own contracts or
at least modify the terms of existing forms. Nevertheless, there is certain
uniformity in the basic framework of a voyage charter, the main elements
include.
Introductory clauses: All standard voyage forms will include an

introductory clause identifying the contracting parties, the vessel, and the
agreed voyage. The only aspect of the vessel’s description which is of any
serious concern to the charterer is its cargo capacity, since otherwise any
43
deficiency in the vessel’s performance is at the risk of the shipowner. So far
as details of the voyage are concerned, the charter may identify the ports of
loading and discharge, or the charterer may be given the right to nominate
such ports, either from a specified list or from a designated geographical
area. In the latter case, an additional clause usually requires the charterer to
nominate a safe port.
Cargo clauses: When the vessel is chartered by a seller for the delivery of
an export order, then the description of the type and quantity of cargo is
likely to be specific. On the other hand, where the object of the charter is a
more general trading venture, then the charterer may be permitted to select
one or more from a specified range of cargoes, e.g. ‘wheat and/or maize
and/or rye’, or may even be entitled to ship ‘any lawful cargo’.. Should a
fixed amount of cargo be specified, such as 10,000 metric tons, it is usual
to qualify the figure with a permitted allowance of plus or minus 5 per cent.
Should the charterer fail to supply the required quantity of cargo, he will be
liable to pay compensation for the shortfall in the form of dead freight.
Freight clauses: The charterparty normally records the agreed rate of

freight, the unit of measurement of cargo to which it applies, and the time
and place of payment. It is important to indicate in the charter whether the
assessment has to be made on the quantity of cargo shipped or on the
quantity discharged. Provision is also made in the standard form for
indicating whether the freight is payable in advance on signing bills of
lading, or only on delivery of the goods at their destination.
Laytime provisions: One of the most important clauses in a voyage

charterparty is in respect of the amount of time allowed for loading and
unloading the cargo. These agreed ‘lay days’ are available free of charge to
the charterer, who is regarded as having paid for them in the freight. If
these lay days exceed the days available free of charge, the charterer has to
pay compensate the shipowner either in the form of agreed damages
(known as demurrage) or un-liquidated damages (known as damages for
detention). In the negotiations leading up to signing the charter, therefore,
the charterer will be anxious to secure an adequate number of lay days to
cover unexpected contingencies which might arise during the loading or
44
discharging operations, while the shipowner will seek to restrict the number
in order to have his vessel free as soon as possible for employment
elsewhere. In view of the financial implications involved, it is essential that
laytime provisions are precisely defined, otherwise litigation will invariably
result.
Arrived ship: A vessel is an "arrived ship" and the laytime allowed under
the charterparty begins to count as soon as the following events occur:
The vessel must reach the contractual loading or discharging destination as
stipulated in the charter. ("Geographical arrival".)
- The vessel must be ready in all respects to load or to discharge or lie at
the disposal of the charterers. ("Actual readiness".)
- Proper Notice of Readiness ("NOR") must have been given to the
shippers or consignees in the manner prescribed in the charterparty.
("Triggering off laytime".)
The preliminary voyage: The port of loading may be specified in the

charterparty or the charterer may be given the right to nominate a port
either from a given geographical area. Where the port is specified in the
charter then the shipowner is under an absolute obligation to go there and
there is no implied warranty by the charterer as to the safety of the port.
Where the charterer has a right to nominate the port, he must exercise his
election within the time specified, or otherwise within a reasonable time. If
he fails to do so, the shipowner is not permitted to withdraw his vessel but
must wait for instructions unless the delay is so prolonged as to result in
frustration of the charterparty. The charterer is, however, liable for any loss
to the shipowner resulting from the delay in giving the necessary
instructions. Once the charterer has exercised his election, the selected port
is treated as though it had been named in the charter and the choice is
irrevocable.
The voyage to the loading port: It will rarely be the case that at the time
when a vessel is chartered it will already be in berth at the port of loading
ready to perform the charter. In the great majority of cases it will be at
some distance from that port and will in all probability be trading under a
prior charter. It will therefore be necessary for the vessel to undertake a
45
preliminary voyage to the agreed port of loading, and this will form the first
stage in the performance of the charterparty.
The loading operation: The traditional division of responsibility at

common law for the loading operation between shipowner and charterer is
based on the ‘alongside rule’. It is the responsibility of the charterer to
bring the cargo alongside the vessel and within reach of the ship’s tackle
after which it is the duty of the shipowner to load it. A similar rule operates
in reverse in relation to the discharging operation when the consignee is
under an obligation to receive the cargo after it has been put over the side
by the shipowner and is free of the ship’s tackle. The ‘alongside rule’
represents an appropriate division of labour in the basic situation where the
loading and discharging is to be performed by means of the ship’s tackle,
since it results in the charterer being responsible for the cost of the work
done on land, and the carrier for the work done on board. In the absence of
express agreement to the contrary, however, the common law implies the
‘alongside rule’ and the charterer is merely responsible for the cost of
bringing the cargo within the reach of the ship’s tackle.
The carrying voyage: On completion of the loading operation, the

responsibility for continued performance of the charterparty will be
transferred to the shipowner. His obligation will be to proceed with
reasonable dispatch and convey the cargo to the designated port of
discharge
The discharging operation: Laytime will run from the moment the vessel
arrives at the port of discharge and is ready to unload. The respective
obligations of shipowner and charterer are similar to those at the port of
loading except for the fact that the operation is conducted in reverse.
Discharge is a joint operation, the shipowner being responsible for moving
the cargo from the hold to the ship’s side and the consignee for taking it
from alongside. Where lighters are required for receiving the cargo
alongside, the cost will normally fall on the charterer. This division of
responsibility may of course be modified by the custom of the port or by
express provision in the charterparty. Thus it may be agreed that the
shipowner will be responsible for the cost of discharging, in which case he
46
will have to bear such incidental expenses as the cost of any necessary
rebagging of the cargo.
Delivery: The shipowner is under a contractual obligation to deliver the

cargo to a specified, or identifiable, person. Normally the requirement is to
deliver to the consignee named in the bill of lading or to any person to
whom the consignee has validly indorsed the bill. In the event of no bill
having been issued, the consignee will normally have been designated
either in the charterparty itself or in a non-negotiable receipt.
Other clauses: The clauses outlined above form the characteristic

framework of the voyage charterparty but to them will be added a selection
of other provisions covering such matters as the shipowner’s responsibility
for the care of cargo, the conditions under which the vessel may be entitled
to deviate from the agreed route, and a group of clauses dealing with the
effect on performance of the contractual obligations of such factors as ice,
war or strikes. These clauses tend to vary as between the various standard
forms of voyage charter and are frequently modified by the parties
themselves
Time Charterparty: In the time charter the shipowner is placing his vessel
for an agreed period at the disposal of the charterer who is free to employ it
for his own purposes within the permitted contractual limits. As the charterer
controls the commercial function of the vessel, he is normally responsible for
the resultant expenses of such activities and also undertakes to indemnify the
shipowner against liabilities arising from the master obeying his instructions.
While there are a variety of standard forms of time charter, the following
clauses are usually found to constitute the core of the contract.
a) Vessel: The efficiency of the chartered vessel is of vital importance to
the time charterer since the entire success of the commercial enterprise
may depend on it. The preamble to the charter therefore sets out in
detail the specifications of the vessel, the most important of which are
normally those relating to speed, loading capacity and fuel
consumption.
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b) Period: A clause in the charter will normally specify the precise length
of the charter period in days, months, or years.
c) Off-hire: Hire is payable throughout the charter period irrespective of
whether the charterer has any use for the vessel. On the other hand,
provision is normally made in an off-hire clause that no hire shall be
payable during periods when the full use of the vessel is not available
to the charterer because of some accident or deficiency which falls
within the owner’s sphere of responsibility. The clause specifies the
occasions on which the vessel will go off-hire and is normally
triggered by the mere occurrence of the event, irrespective of any fault
on the part of the shipowner.
d) Payment of hire: The right to withdraw for non-payment: Hire is the
price paid for the use of the vessel and is usually calculated on the
basis of a fixed sum per ton of the vessel deadweight for a specific
period of time, such as 30 days or a calendar month. It is normally
payable in advance at monthly or semi-monthly intervals. At common
law time is not of the essence of a charter of this type with the result
that a shipowner cannot repudiate the contract for late payment of hire
unless the delay is such as to frustrate the object of the contract. It is
consequently standard practice for a specific clause to be included in
the charter giving the shipowner the right to withdraw his vessel in
default of payment of an installment of hire on the due date.
e) Employment and indemnity clause: Most charters include a clause
entitling the charterer to have full use of the vessel within the limits
stipulated in the charter and undertaking that the master will comply
with the charterer’s orders and instructions to this end. The limits
imposed on the charterer’s trading activities will depend on individual
agreement between the parties but may extend to cover the types of
cargo to be carried and the geographical limits of permitted trading.
There will also invariably be included in an express requirement that
the charterer will only employ the vessel between safe ports.
f)f) Return of the vessel: The charterparty will normally require the
charterer to maintain the vessel in ‘an efficient state’ during the period
of hire, while the redelivery clause will expect the vessel to be returned
‘in the same good order as when delivered to the charterers (fair wear
and tear excepted).’
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Bareboat/Demise charter party: There has been tremendous growth in
bareboat chartering as a fleet acquisition technique coupled with the
increasing use by shipowners of open registries which led BIMCO to
consider a revision of BARECON A and BARECON B forms to update the
forms consistent with the latest bareboat chartering practice. There are
numerous clauses that constitute the core of the bareboat charter party
contract. Some of the pertinent clauses include.
a) Definitions: Such as a Vessel, Repairs and Financial Instrument have
been provided. Financial Instrument in this instance, refers to the
"mortgage, deed of covenant or other such financial security
instrument".
b) Charter Period: it was felt that a logical and useful addition to the
Charter would be a specific new clause stating the period for hires.
c) Delivery: The charterer is now required to direct the owners to deliver
the vessel to a prescribed ready "safe" berth. The provision also requires
that the vessel's survey cycles are up to date and that trading and class
certificates are valid for an agreed number of months following
delivery.
d) Time for Delivery: it shall contain the usual provisions relating to the
date before which the vessel cannot be delivered, but now also
incorporates an obligation for the owners to exercise due diligence to
deliver the vessel no later than the cancelling date.
e) Cancelling: This Clause now incorporates a time limit of 36 running
hours following the cancelling date during which the charterers must
decide whether or not to exercise their option to cancel the vessel if it
arrives late. If the charterers fail to make a decision within that time,
then they lose the right to cancel the Charter. The 36 running hours
period is designed to deter the charterers from prevaricating unduly over
the vessel and potentially preventing the owners from securing suitable
alternative employment at the earliest opportunity.
f) Trading Restrictions: According to this Clause, the charterers
undertake not to employ the vessel under terms that are not in
conformity with the terms of the insurance without first obtaining the
consent to such employment of the insurers.
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g) Surveys on Delivery and Redelivery: This Clause deals with the usual
on-hire survey and off-hire survey procedures and allocation of cost and
time between the contracting parties. No provision is made in respect of
dry-docking the vessel in relation to the on-hire or off-hire surveys as
this is not considered normal practice in bareboat charters and should be
left to the parties in each individual case to discuss and negotiate as
appropriate.
h) Inspection: This provision gives the owners the right to inspect or
survey the vessel throughout the charter period. The owners have the
right to inspect the vessel for three express reasons that is for a survey to
satisfy the owners that the vessel is being properly repaired and
maintained; for a survey while the vessel is in dry dock if the charterers
have not dry docked the vessel at the regular intervals agreed; and, for
"any other commercial reason", although this right is balanced by the
requirement that the inspection should not unduly interfere with the
commercial operation of the vessel.
i) Maintenance and Operation: One of the most important consequences
resulting from the bareboat chartering of a vessel is that during the
entire period the vessel is in full possession and at the absolute disposal
for all purposes of the charterers. Consequently, the responsibility for
maintenance and operation and all costs and expenses arising from these
activities rests with the charterers. The Maintenance and Operation
Clause has been restructured to provide, where appropriate, clear sub-
heading titles to make the provision easier to read. Breach of the
charterers' obligation to maintain and repair may entitle the owners to
withdraw the vessel if the charterers fail to effect repairs, etc., within a
reasonable time.
16.2.10 EMERGING ISSUES AND TRENDS

a) explain emerging issues and trends
b) discuss challenges posed by emerging issues and trends
c) discuss ways of coping with challenges posed by the emerging issues
and trends
50
Introduction
With the development of international trade and the increased use of
containers, sea carriage may form only one leg of a combined transport
contract. The use of containers has in effect brought about many
developments to the law of carriage of goods by sea and consequently, the
law applicable to those contracts. Modern contracts of carriage are now
negotiated on a door-to-door basis and involve a series of different modes of
carriage and a succession of different carriers. This chapter will thus explore
the nature of combined transport as an emerging trend under the law of
carriage of goods by sea and highlight the challenges arising out of use of
combined transport documents while proposing the way forward to deal with
the identified challenges.
Task 1: Explaining emerging issues and trends
Contracts of goods that involve a sea leg among other modes of transport
may take different forms:
a) A combined transport operator may negotiate a single contract a freight
forwarder may act as the shipper's agent and create a series of individual
carriage contracts with separate carriers by rail, road or sea. Each such
contract will be independent and subject to the relevant unimodal terms
and conventions. In such circumstances the freight forwarder will
normally exclude any personal liability for damage or loss during
carriage and transshipment from one mode to another will normally be
stated to be at the cargo owner's risk;
b) A specific carrier (or freight forwarder) may act as principal for one stage
of the carriage and as agent for the shipper to negotiate independent
contracts of carriage for the other stages. Thus a sea carrier may arrange
for transport of the containers by road to the port of loading and for
delivery by rail from the port of discharge. In such a case each carrier
would only be responsible for his own state and each of the series of
contracts would be subject to its own relevant unimodal terms. Here
again, provision would be made for any transshipment to be at the risk of
the cargo owner; or
c) For multimodal transport operator to negotiate a single contract for
multimodal transport on a door-to-door basis. Under such a scheme, the
51
combined transport operator would remain solely responsible to the
cargo owner for the safety of the goods during transit, having negotiated
separate contracts for the different legs with individual unimodal carriers.
The essence of such an arrangement is that the cargo owner would not be
in contractual relations with individual 'actual' carriers and his rights and
liabilities would depend solely on the terms of the combined transport
contract.
Consequently, many modern shipping documents are now drafted in a

form in which they can be used interchangeably for either combined
transport, through transport or on a port-to-port basis, and include terms
appropriate for each contingency.
ICT era has also brought about the interplay of trade and technology
for efficiency and effectiveness.
Task 2: Discussing challenges posed by emerging issues and trends
i) Wide scope of terms and conditions: The main problem encountered

by the parties to a multimodal contract of carriage of goods partly by sea
stems from the potentially wide scope of terms and conditions of
carriage in operation between different modes. The problem is
aggravated by the existence of mandatory transport conventions
imposing different liability regimes on the operators of the various
modes of transport.
ii) Liability of Carrier: In the absence of an applicable mandatory
international convention the parties to a combined transport contract are,
of course, entitled to negotiate their own terms and can impose on the
carrier a uniform legal liability throughout the period of transit. Even if
an international convention is applicable on one leg, the parties may still
agree on a uniform liability throughout the remainder of the transit. In
the majority of cases however, the extent of the carrier’s liability will be
purely dependent on locating the place where the damage or loss
occurred. The main modes of carriage by goods all have their
‘own’ Convention or Rules which may apply either by law or contract
52
to regulate the rights and liabilities in respect of that mode of carriage.
Specifically:
- For sea carriage there are, Hague Rules, HVR, and the various
statutory enactments of them, the Hamburg Rules and the Rotterdam
Rules;
- For carriage by road - the CMR may apply, pursuant to the provisions
of the statutory enactment of the CMR;
- For rail carriage, the CIM convention; and
- The Warsaw Convention for carriage by air.
The interaction between these conventions brings about legal
difficulties.
iii) Stage of loss: combined transport documents often provide for the
application of different regimes or terms, depending on the stage of
carriage during which the loss occurred. This is mainly because
different conventions apply to different legs of the carriage, and the
prescriptive periods under those conventions vary. It may be difficult
for the parties to ascertain at what stage loss or damage occurred
between the time of consignment by the consignor and receipt by the
receiver (or discovery of the loss of the goods). This may not matter in
a single-stage transit or in a multi-stage transit where the first carrier
remains liable for the goods on the same terms regardless of where the
loss or damage occurred. It may however be problematic in respect of
MSBs in two situations, thus: (i) where the first carrier contracts with
the second carrier as the shipper’s agent for the second leg of the
transit; or (ii) where the liability depends on the stage at which the
goods are lost or damaged. In the first situation, there are two separate
contracts to which the cargo owner is a party and if he is to succeed
against either the first or the second carrier, he must show that the loss
occurred when the goods were in the custody of the party sued. He may
however, be able to rely for this purpose on any acknowledgement by
the second carrier of receipt of the goods in good order and condition.
There is at present no presumption of law that that onus is on the last
carrier to account for damage or loss, at least in English law, and by
extension, under Kenyan law. In the second situation, the position is
less clear. On principle where a carrier seeks to invoke a clause to
53
reduce or avoid liability he will have the burden of proof in showing
that he falls within it, and this will entail an assumption of the burden of
showing that the clause is applicable.
iv) Claims in tort: In combined transport, performance of individual legs
is frequently sub-contracted by the combined transport operator to
independent carriers. In such an event there is no contractual
relationship between the cargo owner and the actual carrier, the latter
having concluded a unimodal contract with the combined transport
operator and being presumably bound by any relevant unimodal
convention. There is, therefore, nothing to prevent the cargo owner
from suing the actual carrier in negligence and thus circumventing any
limitation clause in his contract with the combined transport operator.
v) Aspects of Hague and Hague-Visby Rules: The Hague and Hague
Visby rules apply compulsorily where the sea voyage is from port in a
contracting state, but mere transhipment in such a state is not sufficient
for such a purpose. This is because ‘shipment does not mean
transhipment’.
vi) Combined transport and documentary credits: the need for
documentary credit to finance international trade us as great when
combined transport is used as when goods are shipped by some form of
unimodal carriage. From the banker’s point of view, however, the
security provided by the combined transport document is not as
effective as that available under an ocean bill of lading. First, such a
document covering the entire transit period is not statutorily recognised
as a document of title. Secondly, as the goods normally originate from
an inland point of shipment, the document is a ‘received for shipment’
bill rather than the ‘shipped’ bill desired by the banking fraternity.
vii) Inadequate ICT security systems as well as slow pace acceptance of
use of ICT.
Task 3: Discussing ways of coping with challenges posed by the

emerging issues and trends
a) Lack of a uniform multimodal regime: With regard to the lack of a

uniform multimodal regime, the gap has been partially filled by the
production n of a set of Rules for a Combined Transport Document by
54
the International Chamber of Commerce (ICC), which are available to be
incorporated by the parties into their individual contracts.
b) Claims in tort: The problem of claims in tort can be closed by any of
the traditional methods employed in a similar situation by the draftsmen
of ocean bills of lading. On the one hand, the introduction of a Himalaya
clause into a bill of lading is designed to extend to servants, agents or
independent contractors all the protection afforded to the carrier by the
terms of the contract of carriage.
c) Documentary credits: Banking practice has had to adapt itself to the
transport revolution and as a result banking procedures have been
considerably modified as evidenced by the 2007 edition of the ICC’s
Customs and Practice for Documentary Credits. The rules now provide
that, unless the credit stipulates an ocean bill of lading, a combined
transport document is acceptable even in short or blank back form.
d) Review and Implementation of ICT security measures to enhance
integrity in terms of technology
55
REFERENCE
1. Carriage of Goods by Sea 7th Edition, John F Wislon;

2. Francesco Berlingieri Paper, “ Comparative Analysis of the Hague
Visby Rules, The Hamburg Rules and the Rotterdam Rules;
3. Bills of Lading by Sir Richard Aikens Richard Lord, Michael
Bools, London 2006;
4. Principles of Conflict of laws, 3rd Edition Abla Mayss;
5. International Law, Malcolm N Shaw, 6th Edition;
6. Modern Tort Law, 7th Edition;
7. A summary of General Criticism of the UNCITRAL Convention (The
Rotterdam Rules) by William Tetley, December 2008;
8. Hague and Hague Visby Rules;
9. Hamburg Rules;
10. Rotterdam Rules
11. UN Convention on Multimodal Transport;
12. Carriage of Goods by Sea Act, Cap 392, Laws of Kenya;
13. Judicature Act, Cap 8, Laws of Kenya;
14. https://www.lawteacher.net/4
15. http://www.uncitral.org/uncitral/en/uncitral_texts/transport_goods/Ha
mburg_rules.html
16. http://lawexplores.com/a-short-history-of-the-bill-of-lading/
17. http://www.kenyalaw.org/lex//index.xql
56
Marine Insurance
57
List of Figure
Figure 1: The elements of Risk Assessment. .....................................112

53
58
List of Tables
Table 1: Marine Cargo Insurance Premiums by Country ...................25

84
Table 2: Marine Insurance Earnings by Region..................................26

85
59
26.3.0 MARINE INSURANCE
Introduction
The module unit is intended to equip the trainee with knowledge, skills
and attitudes that will enable him/her to operate in the marine
insurance environment effectively.
General Objectives
By the end of the module unit, the trainee should be able to:
a) recognize players and segments of marine insurance market
b) process marine insurance contractual documents in compliance
with the relevant laws
c) assess risks in maritime transport
d) process marine insurance claims
e) apply the legal principles of insurance to marine insurance
26.3.01 INTRODUCTION TO MARINE INSURANCE

a) explain the meaning of insurance
b) explain the meaning of marine insurance
c) describe the history and evolution of marine insurance
d) explain the scope of marine insurance
e) explain the benefits of marine insurance
f) describe the role of marine insurance in international trade
Task 1: Meaning of insurance
The Insurance Regulatory Authority (IRA) defines insurance as a

mechanism through which persons transfer risk(s) to insurance
companies at a fee called premium. The insurance companies in return
promise to pay for the insured loss should it occur. The mandate of
IRA is to regulate, supervise and develop the insurance industry in
Kenya. Its functions include: to ensure the effective administration,
supervision, regulation and control of insurance and reinsurance
60
business in Kenya; formulate and enforce standards for the conduct of
insurance and reinsurance business in Kenya; license all persons
involved in or connected with insurance business, including insurance
and reinsurance companies, insurance and reinsurance intermediaries,
loss adjusters and assessors, risk surveyors and valuers.
Business entities worldwide face unprecedented risk exposures which

threaten their assets. In both personal and business lives we are faced
by various risks which pose financial losses. Various types of risks
affect individuals and business. These may include economic,
financial, maritime, social, and death among others. In the maritime
business sub sector which involves long distance trade in the high seas,
seasonal weather patterns, storms, ice bergs, dangerous sand banks,
heavy weather, theft, dangerous harbours, and piracy are among the
factors and hazards en-route contributing to the general risks exposure.
i) Definition of insurance
Insurance is defined as a risk transfer mechanism. It is a
mechanism by which the financial consequences of an event are
shifted from one party to an insurance company. It is a financial
arrangement that redistributes the cost of unexpected losses.
Insurance involves the transfer of potential losses to an insurance
pool. The pool combines all the potential losses and then transfers
the cost of the predicted losses back to those exposed. Thus,
insurance involves the transfer of loss exposures to an insurance
pool and the redistribution of losses among the members of the
pool. The insurance companies are better placed to handle risks
because they have the financial ability and technical know-how to
handle them.
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ii) Definition of related terms
Risk
Risk is defined as danger, exposure to a mischief or peril. It is also
the chance that some unfavourable event will occur in the
uncertain future. Risk signifies uncertainty in many situations in
life. Though there is no single universally accepted definition of
risk, risk may be defined generally as a condition in which there is
a possibility of an unfavourable deviation from a desired outcome.
In its broadest context the term ‘risk’ describe situations in which
there is an exposure to adversity. Different scholars in risk
management and insurance have defined risk differently. Some of
these other definitions are as follows:
- Risk is a combination of hazards;
- Risk is the uncertainty of loss;
- Risk is the possibility of loss;
- Risk is the chance of loss;
- Risk is the possibility of an outcome being unfortunate;
- The dispersion of actual from the expected results;
- The probability of any outcome being different from the one
expected; or
- A condition in which a loss or losses are possible.
Hazard
In insurance hazard refers to a condition that influences the
outcome of a loss arising from a given peril. Hence, a hazard may
increase or decrease the effect of an operating peril where a peril is
the primary cause of loss.
Uncertainty
The concept of risk revolves around uncertainty where uncertainty
means some doubt about the future on what may or may not
happen. Uncertainty is based on either lack of knowledge or the
existence of imperfect knowledge. It exists even when the person
exposed to the risk does not know of its existence.
62
Insurance Cover
The act of making good in money for the insurable object which
suffered a loss or damage. It means to indemnify in case of loss or
damage.
Task 2: Meaning of marine insurance
Marine insurance is concerned with the insurance of goods in transit

from one place to another by sea, by inland waterways, by rail, road
and air. In addition, it is concerned with the insurance of ships, that is,
Hull insurance to cover loss or damage to the vessel and
machinery/equipment as well as insurance of ship owners’ various
interests and liabilities, and the insurance of freight at the risk of the
carriers.
Meaning of marine insurance

The Marine Insurance Act, Cap 487, Laws of Kenya defines a
contract of marine insurance under Section 3 as follows:
“A contract of marine insurance is a contract whereby the insurer
undertakes to indemnify the assured in a manner and to the extent
thereby agreed against the losses, incident to marine adventure.” It
further provides that, a contract of marine insurance 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. The basis of the Marine Insurance
Act, Cap 487 is the UK Marine Insurance Act of 1906.
Task 3: History and evolution of marine insurance
Marine insurance is the oldest and earliest class of insurance and thus
has a long and eventful history.Out of marine insurance grew all non-
marine insurance and re-insurance.
It is therefore considered as the mother insurance, but however its
origin is lost in obscurity.
63
i) Origin of marine insurance
The origin of marine insurance according to some historians is that
it originated in the medieval Italian city-states during the middle
ages, from where it spread to other trading nations. Others have
attempted to trace it to the Rhodian merchants who traded in the
Mediterranean Sea in 900BC and claimed to have introduced
certain maritime customs and practices. Some other historians say
that a form of mutual insurance was practiced in China around
4000BC.
Modern marine insurance practice as a technique for providing

protection against the perils of the sea had its origin in the
“bottomry bonds” which were issued by the Mediterranean
merchants as early as the fourth (4th) century B.C. A “bottomry
bond” was an advance of money on a ship during the period of a
voyage.
ii) Historical background

The earliest records of marine insurance can be traced to Italy
from the 13th Century. From here it spread to other countries in
Europe through the Lombard merchants who dominated British
commerce and finance during the 15th Century.
In the early days, merchants whose goods were carried on the

same ship would share losses of fellow merchants in case of
damage, destruction or losses. Merchants have long recognised
that there was a need to protect themselves against the
consequences of the perils they and their ships and goods faced
while at sea. The earliest records of protection against loss by
marine perils are from about 215 BC when the Roman
government covered suppliers of military stores against loss while
the suppliers were in ships. Other forms of loss sharing were
developed over the years, particularly general average which is
still in use today. General average is thought to have been an
established custom in Rhodes between 916 BC and 700 BC.
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The first time insurance was practised was by the merchants of
Lombardy in Northern Italy in about 1250 AD. A number of them
immigrated to Britain at about that time where they practised
marine insurance from their base in the City of London which
soon became known as Lombard Street. By the end of the 15th
Century, so many restrictions were placed on the then wealthy
Lombard merchants in response to jealousy from the English, that
the Lombards left London.
Marine insurance then passed to the Hanseatic merchants who
traded from London but mainly out of the Baltic coastal towns.
Marine as we know it today, was started in a coffee house named

The Lloyds Coffee House in 1688. In this coffee house,
merchants carrying on international maritime trade congregated
to transact business. It brought together traders and financiers
who would cover any risks undertaken by the traders. The
financiers acted as the insurers of the adventures by writing under
each business placed.
Task 4: The scope of marine insurance
Although the primary role of marine insurance is to provide protection

against the operation of the maritime perils, the marine insurance
policy can extend by agreement to protect the assured against losses on
inland waters or on any risk which may be incidental to any sea
voyage. Marine Insurance also applies 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.
i) Areas of risk covered

Marine insurance policies relate to three main areas of risk:
a) The hull which refers to the vessel/ship, its equipment,
machinery and spare parts. This type of policy covers the ship
against sea related perils including fire and theft as well as
liability to others arising out of the use of the vessel.
65
b) The cargo which refers to the goods carried by the vessel .A
cargo policy covers goods carried by the ship against all sea
related perils including fire and theft
c) Freight – This refer to the amount paid to hire the vessel. It can
be said to be the sum paid for transporting goods or for the hire
of a ship.
ii) Water transport

The primary function of marine insurance is protection for the
owners of ships and cargo against the maritime perils. It is meant
to compensate the owners of ships and cargo in a manner and to
the extent thereby agreed against marine losses that is to say,
losses incident to marine adventure.
iii) Combined transport

Today, cargo insurance is frequently referred to as ‘transportation
insurance’. This is because cargoes are not only carried by
oversees vessels, but also by road vehicles, railways, aircraft and
all other forms of commercial conveyance. While ‘transportation
insurance’ may be a more accurate description for the present
day, it is worth noting that Section 3 (2) of the Marine Insurance
Act, Cap 390 Laws of Kenya provides that:
“A contract of marine insurance may, by its express terms or
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”.
Marine insurance is therefore concerned with the insurance of ships,

that is Hull insurance to cover loss or damage to the vessel and
machinery /equipment as well as insurance of ship owners’ various
interest and liabilities, insurance of goods that is cargo insurance to
cover goods in transit from one place to another by sea, by inland
waterways, by rail, road and air, and the insurance of freight at the
risk of the carriers.
66
Task 5: Benefits of marine insurance
Marine insurance plays a very important role to the individual

maritime business people, community and the nation. The benefits of
marine insurance are not only economic but also social in nature.
i) Cargo owner and Carrier

Marine Insurance provides the following economic and social
benefits to the cargo owner and carrier:-
a) Peace of mind - When individuals know that marine insurance
exists to meet financial consequences of their insurable risks,
they will invest larger amounts of money than those they could
have invested if it were not for marine insurance.
b) Financial protection – Marine insurance lessens the financial
hardship brought by the occurrence of the insured event by
compensating for loss, damage or destruction of one’s property
due to maritime perils.
c) Preservation of income - Since marine insurers will provide
funds by way of compensation for loss or damage to property
by maritime perils, cargo owners are able to continue with their
businesses and contribute to the national economy.
ii) Nation
a) Job Creation and Retention - Investors have the confidence to
put money in commerce and industry because marine insurers
give assurance of compensation in the event of a loss in the
high seas. The investments create job opportunities in the
nation. At the same time, in the event of an unfavorable event,
such as a piracy or damage by fire, a company does not have to
close down and render workers jobless because marine insurers
will compensate for the loss and, therefore, ensure that jobs are
thereby retained. Marine insurance therefore ensure the
preservation of source of income.
b) Loss Control and Reduction – Marine underwriters are actively
involved in the reduction and control of losses. Through the
efforts of the Association of Kenya Insurers, the Kenya-
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Reinsurance Corporation and the Association of Insurance
Brokers of Kenya, television programmes aimed at reducing
insurable loss are aired. This enlightens the public on loss
control measures. Insurers also make use of surveyors, risk
managers and loss adjusters to offer advice on risk
improvement measures and risk reduction techniques should
the loss occur.
c) Investment of Funds – Marine Insurers have at their disposal
large sums of money which they can lend to individuals, the
government, commerce and industry. The funds arise from a
time lag between when premiums are collected and when
claims are paid. When borrowed, these funds are used for
economic development. Insurance companies are major
purchasers of treasury bills and other government securities.
d) Invisible Earnings - Insurance allows people and organizations
to spread risks amongst themselves and also a cross-border
with insurers in other countries. When marine insurance is sold
in another country the business is recorded as insurance
‘export’ in the balance of trade payments (measured as
premiums less claims).When companies from neighboring
countries insure in Kenya, Kenya becomes an exporter of
insurance services. This has the effect of improving the
balance of trade (the difference between the value of the export
and imports) and adds to the wealth of the country.
The Practice of Marine Cargo Insurance in Kenya

Section 20 of the Insurance Act 20, Cap 487 related to placing of risks
with insurers and reinsurers not registered under this Act provides as
follows:
1. No insurer, broker, agent or other person shall directly or indirectly
place any Kenya business other than reinsurance business with an
insurer not registered under this Act without the prior approval,
whether individually or generally, in writing of the Commissioner.
place any reinsurance of Kenya business with an insurer not
registered under this Act except under the following conditions:
68
a) in the case of treaty reinsurance, with the approval of the
Commissioner to the treaty, and subject to such restrictions as
he may specify;
b) in the case of facultative reinsurance subject to the prior
approval in writing of the Commissioner to the placing of each
particular risk with insurers or reinsurers not registered under
this Act.
The Act defines “Kenya business” and “Kenya reinsurance business”

as insurance business carried on by an insurer in respect of any person,
human life, property or interest situated in Kenya, or in respect of
which premiums are ordinarily payable in Kenya and include insurance
business in respect of any vessel, hovercraft or aircraft registered or
ordinarily located in Kenya and includes marine cargo insurance
policies on all imports entering Kenya, including marine cargo
insurance policies for commercial imports, but excludes marine cargo
insurance policies issued on personal effects, goods and items
imported into Kenya by returning residents or passengers entering
Kenya for permanent or temporary residence;
Most importers from the East African region import on Cost Insurance
Freight (CIF). When goods are imported on CIF basis, it means that
the importer has no control over the transportation and insurance
services in the entire logistical supply chain as it is organized at the
source market. The National Treasury in Kenya gave a directive to
cargo importers requiring that all imports to Kenya be insured by
Kenyan underwriters’ insurers with effect from January 1, 2017. Up
until 2016, 90 percent of Kenya’s imported goods were insured by
foreign underwriters, which imply that the importers were exporting
Kshs.20-25 billion in currency to the offshore located companies.
According to Insurance Regulatory Authority (IRA), there were 49
registered insurance companies in Kenya with 34 offering marine
cargo insurance products. The implementation of this Government
directive is expected to increase the premiums of the local marine
69
insurance providers to over Kshs.20 billion from Kshs.2.9 billion
generated in 2016.
Benefits of securing marine cargo insurance locally.

Benefits accrue to both the Government and the individuals as a result
of importers securing local marine cargo insurance. These are
highlighted as below:
National benefits
a) Development of local insurance sectors;
b) Increased revenues for the state budget via taxes on insurance;
c) Creation of job opportunities in local companies;
d) Reduced expenses in foreign currency, thus improving external
trade balance.
Individual benefits
a) Discounts on insurance rates given to regular/quantity importers;
b) Foreign exchange savings accruing from transacting insurance in
local currency;
c) Easier processing of insurance claims;
d) Freedom to procure the most suitable insurance cover for FOB
imports thereby controlling premium cost;
e) Provision of all facts and an optimistic viewpoint of the risk
leading to a more realistic assessment of the premium;
Task 6: Role of marine insurance in international trade
Marine insurance plays an important role in international trade and

commerce. No large-scale enterprise could possibly function had it not
been possible to transfer many of its risks to insurers. Vast amount of
capital are always at risk and without insurance businessmen would
have to put aside some of their capital resources against the possibility
of fortuitous losses. When there is insurance protection, the question of
keeping aside a portion of capital to meet the unforeseen contingencies
would not arise, as insurers would then come forward to indemnify the
insured against these losses. Not only, therefore, is capital safeguarded
70
by insurance, but it is also freed for further development of business
and trade. Those who run businesses may have their own specialties to
run their own business or trade, but may be handicapped by their lack
of Knowledge of risk management. Insurance removes the anxiety thus
arising by making available its expertise; business efficiency is thereby
increased. Further, the knowledge that the business protected from
catastrophe losses will encourage enterprises and lead to the
undertaking of ventures which might otherwise have been shelved as
too risky for the individual concern to embark upon.
Marine insurance occupies important position in overseas trade and

commerce as it provides protection against fortuitous losses, it enables
all those engaged in overseas trade to venture their capital freely then
would otherwise be possible and in this way helps greatly to expand
the scope of their operations. In the present day commerce, the banks
are largely responsible for financing the overseas trade of the world.
The usual method is for the buyer to forward to the seller of goods a
letter of credit drawn on a banking house. This is a non-negotiable
document, being merely an authority from the banker who signs it to
the banker or other person to whom it is addressed to honor the draft of
the person named in it on production of some other documents that
may be required. This draft is usually in the form of a bill of exchange
against the value of each shipment. Provided it is accompanied by
other required documents of title to the goods, the bank will be
prepared to discount the bill. Such other required documents to title
are: Bill of exchange, Bill of lading, Commercial invoice and Marine
policy. In this way the seller is put into funds immediately, instead of
waiting for some time for a remittance to be received from his
customer abroad for the goods shipped. This system makes it possible
for the exporter to use his capital always instead of having it locked up
in goods in transit. The importance of marine insurance in this credit
system is such that the goods, as specified in the letter of credit, are
insured against marine risks and the policy, along with other
documents is lodged with the bank as collateral security. The advance
made by the bank is primarily secured on the goods, and if these are
lost or damaged in transit, the security would, but for the insurance, be
71
lost or diminished. The documents are forwarded to the bank’s branch
or agent at destination and are delivered to the buyer against payment
of the amount of the draft. He can then collect his goods from the ship
against the bill of lading, and if they are damaged he can claim on the
insurers for such damage, where it is recoverable under the terms of
the policy. There is no legal compulsion on a merchant to insure his
goods against marine perils, but in practice this must be done, as the
bank will insist for it. Even where a bank does not finance shipments,
common prudence calls for marine insurance protection, particularly as
the cost is only a fraction of the market value of the goods.
In summary, Marine insurance plays a very significant role as a risk

transfer in dealing with liability risks, risk management and facilitation
of international trade as highlighted below:.
i) Liability
Marine insurance particularly hull insurance play a critical role in
liability risks. The owners of vessels are exposed to liability
resulting from damage to third party properties, loss of life (third
parties, crew, and passengers), environmental damage or pollution
caused by oil spill and hazard to navigation/damage to the
environment caused by wreck of vessels.
ii) Risk management

There are two broad techniques that are used in risk management
for dealing with risks that is; risk control and risk financing. Risk
control focuses on minimizing the risk of loss to which the firm is
exposed and includes the techniques of avoidance and reduction.
Risk financing involves devices that focus on arrangements
designed to guarantee the availability of funds to meet those
losses that do occur. It includes the techniques of risk assumption
and risk transfer. In the maritime business, risk transfer is by way
of marine insurance where ship owners, merchants, cargo owners,
carriers among others transfer the financial consequences to
marine underwriters.
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iii) Trade facilitation
Marine insurance plays a critical role by way of being a risk
transfer mechanism where owners of vessels and goods transfer
their maritime risks to Marine insurers. Consequently, marine
insurance is essential to overseas trade and shipping. Research
shows that cargo transported by sea account for almost 90% of all
cargo transported internationally. Hence, business people are
encouraged to venture into international trade because of
availability of marine insurance that is it supports international
trade due to the maritime risks and perils involved in the marine
adventure.
26.3.02 MARINE INSURANCE MARKET

a) explain the meaning of marine insurance market
b) describe the categories of marine insurance market
c) describe the structure of marine insurance market
d) explain the roles provided by market players in marine insurance
e) describe the market forces in marine insurance
f) explain the size of marine insurance market
Task 1: Meaning of marine insurance market
Traditionally, a market connotes a physical place where buyers meet

sellers, and occasionally intermediaries, to examine the merchandise,
which is the subject of sale. Whilst this kind of market may make
sense for goods, it cannot be used for buying and selling of service
such as marine insurance.
In Kenya, marine insurance is provided by insurance companies,

which also offer marine insurance products and services. In the UK,
marine insurance companies and Lloyd’s provide marine insurance.
The London market is the main centre for marine business and, indeed,
is a centre for international marine business.
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i) Definition of market
Traditionally, a “market” was a physical place where buyers and
sellers gathered to exchange goods. The term market in marketing
refers to the group of consumers or organizations that is interested
in the product and has the resources to purchase the product.
ii) Definition of insurance market

The insurance market refers to the mechanism by which buyers and
sellers of insurance meet rather than the actual physical location. It
consists of sellers, intermediaries, buyers and service providers.
iii) Definition of marine insurance market

Marine insurance market refers to the mechanism by which buyers
and sellers of marine insurance meet to transact marine insurance
business. It is the mechanism through which buyers of marine
insurance communicate and transact business with the sellers of
marine insurance.
Task 2: Categories of marine insurance market
Marine underwriters or insurers include those who underwrite various

maritime risks particularly, cargo risks, hull and machinery including
equipment risks as well as third party liability risks.
i) Marine cargo
Most countries have domestic markets where cargo insurance and
small hull risks such as fishing, coastal and small passenger crafts
are placed. In Kenya the market comprises of insurers/underwriters.
About 90% of marine business in Kenya is cargo business (exports)
and the remaining 10% is restricted to small fishing and pleasure
vessels as well as Yatch.
In UK, the Lloyd’s market is the most significant. There are also
mutual and captive companies in the UK market. Hull and
Machinery.
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Larger hull risks are either written abroad in major marine
insurance centres (UK, USA, Norway, France and Germany).Of
the places that support a marketplace for acceptance of domestic
and overseas marine hull and machinery risks, the biggest are
London, USA, Norway, France, and Germany.
ii) Third party liability – Protection and Indemnity clubs (P&I).

This is a network of ship-owners vowing to mutually bear the
financial risks of another particularly the liability risks. P&I cover
is designed to complement a vessel's hull and machinery insurance
and related covers. It is distinguished from ordinary marine
insurance in that it is based on the not-for-profit principle of
mutuality where members of the club are both the insurers and the
insured. Consequently, the scope of cover offered by P&I
insurance is unsurpassed in its reach and cost-effectiveness. "P&I,"
provides cover to ship owners, operators, and charterers for third-
party liabilities encountered in the commercial operation of entered
vessels. The main risks covered are liabilities, expenses, and costs
for:
a) Loss of life, injury and illness of crew, passengers and other
persons
b) Cargo loss, shortage or damage
c) Collision
d) Damage to docks, buoys and other fixed and floating objects
e) Wreck removal
f) Pollution
g) Fines and penalties
h) Mutiny and misconduct by crew
i) Crew repatriation and substitution
j) Damage to property on board the insured vessel
k) Quarantine
l) Vessel Diversion Expenses
m) Unrecoverable General Average contributions
n) Vessel's proportion of General Average
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Task 2: Structure of marine insurance market
The structure of marine insurance market consists of the following

players: sellers, the buyers, the intermediaries and service providers
who are engaged to provide specialized services in the marine
insurance industry.
i) Sellers
The sellers include insurance companies, captives and reinsurance
companies. Most of these companies are limited liability
companies with shareholders as the owners. Insurance companies
can be categorized according to the type of insurance business
offered as specialist, life insurance companies, general insurance
companies and composite companies. They can also be classified
according to the form of ownership as proprietary, state owned or
captive. General insurance companies and composite insurance
companies underwrite marine insurance.
General insurance are companies who are authorized to underwrite

short term insurance business only that is, insurance products that
are renewable annually such as all property insurance like fire,
marine, all risks, motor, public liability and health insurance. On
the other hand, composite insurance companies who are authorized
to underwrite both short term and long term insurance business.
ii) Buyers
Buyers of marine insurance comprise of individuals and
organizations. Personal insurance buyers are the private cargo
owners, who buy insurance policies for their own needs e.g. for
motor vehicles, domestic appliances, personal accident and life
assurances.
Commercial insurance buyers make up the biggest percentage of
buyers of insurance e.g. Government organizations, parastatals,
local authorities, industries and commercial organizations
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iii) Intermediaries
Intermediaries are the individuals or organizations that bring
together the two parties to the marine insurance contract that is the
marine insurer and insured. There are two main types of
intermediaries in the marine insurance market in Kenya:
Agents
“Agent” means a person, not being a salaried employee of an
insurer who, in consideration of a commission, solicits or procures
insurance business for an insurer or broker;
In order for one to be an agent, one has to possess a Certificate of
Proficiency in insurance (COP), be appointed as an agent by a
principal (insurer) and be licensed under the Insurance Act Cap
487 by the Insurance Regulatory Authority.
Insurance Brokers
“broker” means an intermediary concerned with the placing of
insurance business with an insurer or reinsurer for or in expectation
of payment by way of brokerage, commission, for or on behalf of
an insurer, policy-holder or proposer for insurance or reinsurance
and includes a health management organisation; but does not
include a person who canvasses and secures reinsurance business
from or to an insurer or broker in Kenya so long as that person
does not undertake direct insurance business and does not have a
place of business, or a resident representative, in Kenya;
These are specialists in the field of insurance and their full time
occupation is the placing of insurance. They are required to uphold
high standards of expertise and are required to place the interest of
their clients before all others. Among other requirements before
licensing under the Insurance Act Cap 487, one must be a company
incorporated under the Companies Act and its principal officer
must be professionally qualified in Insurance.
iv) Service providers

The insurance industry and by extension the marine insurance
utilizes the services of various service providers. These are
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professionals in different fields who are engaged by the industry to
provide specialized professional services whenever necessary. In
marine insurance, they include the following among others:
Marine insurance surveyors

“insurance surveyors” means a person who engages in surveying
risks and in advising on the rate and terms and conditions of
premiums including making suggestions for improvement of the
risks; and, in the marine insurance business, includes a person
who surveys or assesses the losses on behalf of the insured;
Risk Managers
“risk manager” means a person, his clients or employer with regard
to a programme of minimizing losses arising through unforeseen
events, and of minimizing the cost of such protection by physical
or financial measures through insurance or any other means;
Investigators
“Investigator” means the Commissioner or an investigator
appointed under section 9 of the Insurance Act, Cap 487;
Loss adjusters
“Loss adjuster” and “loss assessor” mean persons who do the
business of assessing, investigating, negotiating and settling losses
on behalf of the insurer or the insured;
General average adjusters

Average Adjusters are experts in marine insurance and law,
appointed by any party in a marine claim or dispute. Irrespective
of the identity of the instructing party, the Average Adjuster is
bound to act in an impartial and independent manner.
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Task 4: Roles provided by market players in marine insurance
The various marine insurance market players particularly the marine

insurers, the intermediaries and the service providers play a very
significant economic and social role to the society and to the nation.
i) Provision of cover
The primary role of marine insurers is to provide cover against the
maritime perils. Marine insurance is meant to make good in money
or to indemnify the insured party in case of loss or damage
suffered in the maritime adventure resulting from an insured peril
of the sea.
ii) Underwriting
Marine insurance operate by way of putting in place a system to
transfer risks from individuals to insurers. Those who are willing
to do so, will do so in consideration of paying a premium. From
the premiums paid, marine insurers create a financial pool out of
which the few who suffer losses are compensated. It is pertinent to
note that maritime risks will differ because of the physical and
moral hazards, which are unlikely to be similar. Consequently,
different levels of risks are going to be introduced into the pool at
any given time.
It is the role of the marine insurer/underwriter to assess the risk in

each case and fix a premium that is consistent and or
commensurate with the magnitude of the maritime risk introduced
into the pool.
iii) Surveillance
Surveillance is mainly by the marine insurance surveyors. These
professionals are engaged to assess the extent of the maritime risk
exposure. In marine insurance in particular, they are normally
engaged to oversee the loading and stripping of containerised
cargo, to oversee the loading and discharging of the loose cargo
among others. Surveyors are meant to effect surveillance from the
point of landing to the final destination.
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The main purpose of surveillance is to do intensive vigil,
monitoring cargo in port/air terminals, inspection of cargo at the
final destination, recording losses and identifying liable parties,
and initiation of recovery against liable parties.
iv) Brokerage
An insurance broker is an intermediary concerned with the placing
of insurance business with an insurer or reinsurer. They mainly
represent the interest of their clients (policyholders). Brokers
provide the following services to their clients among others:
a) Give professional advice on matters of insurance.
b) Carry out insurance needs assessment
c) Develop insurance policies for any non-standard risks that
the client may be having.
d) Advice on claim management and arranging for the
necessary documents to the insurer in the event of loss
v) Risk management
In the maritime sector, risk management refers to the process of
identifying what could go wrong in a maritime adventure, the
magnitude of the occurrence and how you go about reducing the
probability of occurrence or severity should it occur.
“Risk manager” means a person, his clients or employer with
regard to a programme of minimizing losses arising through
unforeseen events, and of minimizing the cost of such protection
by physical or financial measures through insurance or any other
means;
Marine insurers, brokers, marine surveyors and loss adjusters are

involved in maritime risk management. There are three key stages
in maritime risk management thus that is; maritime Risk
identification/ awareness, maritime Risk assessment/ evaluation,
and maritime risk control.
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vi) Loss adjustments
A loss adjuster or a loss assessor mean persons who do the
business of assessing, investigating, negotiating and settling losses
on behalf of the insurer or the insured. Loss adjusters contribute
greatly to the minimisation of losses because they know how best
to get a business back on its feet after a loss.
Task 5: Market forces in marine insurance
In marine insurance, the nature of market forces is mainly by way of

competition and cooperation in form of associations by the different
marine market players.
i) Competition
Competition within the marine insurance market is mainly by the
insurers and may take place in the following forms:
a) Prices: This is done by offering lower prices, which may
result from cutting down the cost of operation.
b) Quality: This is done by providing additional benefits to the
policy. Another way is by way of broadening of the coverage
under various policies and offering additional service.
c) Service: This is the service given to clients. Marine insurance
is a promise of future performance and hence this will
materialize only at the time of claim and how we treat the
client at that time will be a test of our service provision.
d) Gifts: These are given in addition to the service the marine
insurer provides.
e) Location and hours of business- some marine insurers have a
branch network that enables customers to be served from their
vicinity. Others are open even during odd hours like lunch
time.
f) Commissions: Insurers who give maximum commission or
treat their agents/ brokers in a special way will have a
competitive edge over those who give low commissions.
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ii) Cooperation
Although there is intense competition in the insurance market,
there are also various areas where the players in the industry co-
operate
The insurance industry co-operates through various bodies such

as; the Association of Kenya Insurers (AKI) and the Association
of Insurance Brokers of Kenya (AIBK).
Task 6: Size of marine insurance market
The marine insurance market in Kenya in terms of penetration is very

low as compared to the other classes of insurance, though it has great
potential.
Implementation of local Marine Cargo Insurance in Kenya is expected
to drive premiums to US$ 100 – 200 million over the next five years.
This would make Kenya the leading country in Africa in the Marine
Cargo Insurance product space, in terms of premiums.
At present, Kenya imports goods worth Ksh 1.6 trillion, 90% of which
are either uninsured thereby attracting the KRA uplift of 1.5% or
insured with offshore insurers. Kenya expects imports to hit Ksh 2.0 to
2.2 trillion by 2020, yielding a potential Marine Cargo Insurance
(MCI) spend of between Ksh 28 to 30 billion annually.
i) National penetration
In Kenya, Marine insurance has over the last six years recorded
low premium as compared to other general insurance classes. Over
the last five years to 2015, Kenya’s Insurance Industry earned a
total of Kshs 13.3 billion in Marine Cargo Insurance premiums
with an estimated Kshs 95.9 billion either paid to offshore insurers
or not paid at all. While the actual magnitude of premiums
expatriated might vary depending on assumptions made, the
amount of premiums written locally pales in comparison to even
the lowest estimate of about Kshs 50 billion based on average
premium rates of 0.5%.
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ii) As of 2015, ISCOS estimated that Kenyan importers expatriated an
estimated Ksh 20 Billion a year in Marine Cargo Insurance to
offshore insurers. In the same year, total local MCI premiums
amounted to Ksh 2.9 billion, a mere 13% of the potential.
iii) The low penetration of marine insurance among local businesses

has been attributed to several factors, key among them being:
- High premiums from insurance providers
- Lack of awareness of the policies available in Kenya
- The majority of imported goods already being insured at the
countries of origin
iv) Regional penetration

The same factors impending the growth of Marine insurance in
Kenya also affect the uptake of Marine insurance regionally and
hence there is low penetration of Marine insurance in the region. In
2014, Africa earned 3 percent of the global total marine premium
which translate to US$0.98 billion. With regard to marine cargo
premiums, Africa earned US$0.58 which accounted for 3 percent
of total global marine insurance premiums.
While Marine Cargo Insurance Premiums in the selected reporting

African countries have grown by an average annual growth rate of
10 percent since 2007, there have been no notable efforts in any of
the reporting countries to drive the purchase of local Marine Cargo
Insurance (Table 1).
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Table 1: Marine Cargo Insurance Premiums by Country
Implementation of local Marine Cargo Insurance in Kenya is

expected to drive premiums to US$ 100 – 200 million over the next
five years. This would make Kenya the leading country in Africa in
the Marine Cargo Insurance product space, in terms of premiums.
v) International penetration
The biggest market places for acceptance of domestic and overseas
marine risks are London, USA, Norway, France and Germany.
Overall, the London market where marine insurance is provided by
marine underwriters and the Lloyd’s is the largest marine insurance
market in the world. On the other hand, Swiss market is a major
force in international marine insurance business.
In 2015, the global maritime insurance market shrank to US$29.9
billion, 10.5% lower than the previous year. In retrospect, this was
likely caused by the rising marine insurance risks associated with
the tightening of various maritime regulations, coupled with lower
return rates. It is notable that, according to statistics from
the International Union of Marine Insurance (IUMI), all four lines
of insurance business - hull, cargo, offshore energy and protection
and indemnity (P&I) - experienced a decline in their premium
income.
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At US$ 32.6 billion, the Global Marine Insurance sector made up
0.7 percent of total Global Insurance premiums in 2014. The
Marine sector is broken down into three distinct segments: In 2014,
Marine Cargo Insurance was 52 percent of total Global Marine
Premiums followed by Marine Hull at 23 percent, Offshore Energy
at 18 percent and Marine Liability at 7 percent.
In 2014 Europe maintained its position as the leading region in
Marine Insurance, earning US$ 17.15 billion or 53 percent of total
Premiums, Europe led again in marine cargo insurance premiums
amounting US$ 7.29 billion which account for 43 percent of the
global total marine cargo insurance premiums (Table 2).
Table 2: Marine Insurance Earnings by Region
Source: International Union of Marine Insurers (IUMI)
26.3.03 RISKS & PERILS IN MARITIME TRANSPORT

a) explain the meaning of risk in marine insurance
b) describe risks in the sea
c) explain the meaning of peril and hazard in marine insurance
d) explain maritime perils
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Task 1: Meaning of risk in marine insurance
Risk is the basic issue with which insurance and by extension marine
insurance deals with. The understanding of “risks” in insurance has
been made difficult by the variety of ways in which the term is used in
daily conversation, in academic disciplines, and even in the business of
insurance itself.
i) Definition of risk
Risk is defined as danger, exposure to a mischief or peril. Though
there is no single universally accepted definition of risk, risk may
be defined generally as a condition in which there is a possibility
of an unfavourable result or deviation from a desired outcome. In
marine insurance, risk implies a condition in which there is a
possibility of an unfavourable result out of a maritime adventure.
ii) Components of risk

Risk is signified by the presence of uncertainty, different levels of
risks and there will always be a cause - that which converts a risk
into a loss. These three are referred to as the components of risks.
iii) Uncertainty
Uncertainty implies some doubt about the future based on either
lack of knowledge or imperfection of knowledge. The concept of
risk revolves around uncertainty where uncertainty in maritime
business means some doubt about the future on what may or may
not happen in a maritime adventure.
iv) Levels of risk

Risks are of different levels. Some risks, such as minor injuries
while playing football and shoplifting, occur frequently but with
very minimal impact. Other risks, such as plane crashes and
marine accidents, occur rarely but their impact is severe. One,
therefore, can state that we have high frequency low severity risks
and low frequency high severity risks.
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v) Risk as the cause of loss
A loss is the occurrence of an insured maritime event such as fire,
which results in a financial disadvantage for the insured. For there
to be a loss there must always be a cause - that which converts a
risk into a loss. The term risk can sometimes be used to refer to the
cause of loss. For instance a fire risk, a theft risk, a liability risk
among others
Task 2: Risks in the sea
Any transit by sea exposes the ship and cargo to naturally occurring
weather and physical conditions, such as storms, lightning, fire, snow,
ice, fog, tides, rocks, sandbanks and volcanic eruption. The ship and
cargo is further exposed to non-natural conditions such as explosion
among others. The above exposures whether natural or non-natural
may result to the risk of loss, risk of damage to vessels as well as cargo
including liability risks to the vessel and cargo owners.
i) Loss
In a maritime adventure, the interested parties may suffer loss. For
instance, the vessel owner may suffer the loss of the vessel by way
of theft; the cargo owner may suffer the loss of cargo and freight
while the financier of the vessel may suffer the loss of security for
the mortgage on the vessel and risk that further repayments will
not be made.
ii) Damage
Transit by sea exposes the vessel to various risks such as collision
or fire and explosion which may cause damage to the vessel or
damage to the cargo in transit. Ship-owners will wish to protect
themselves against fortuitous damage to actual structure of the
ship. They will need to insure the power units such as the main and
auxiliary engines, plus the mechanical gear like cranes and anchors
against the perils of the sea among other main traditional perils.
There is also risk of damage to cargo while on board the ship due
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to fire, entry of water into ship, falling of cargo overboard among
others.
iii) Liability
In the event that there is loss of or damage to the vessel, the vessel
owner, is likely to face not only loss of or damage to their assets
(ship) but also liability to third parties. This can take the form of
damage to or loss of third party’s vessel, damage to third party
cargo and loss of life or injury. Marine hull market covers a full
range of liabilities for ships spending a protracted period in port for
repair or maintenance work, and while laid up and out of normal
service.
Task 3: Meaning of peril and hazard in marine Insurance
The cause and extent of loss determined by the interplay between a

peril and a hazard. In common day today usage, the words ‘peril’,
‘hazard’ and ‘risks’ are frequently used interchangeably. In insurance
however, these words have very precise and distinct meanings.
i) Peril: A peril is the primary or the prime cause of loss. For a risk
to become a loss there has to be a peril. The occurrence of a peril is
beyond the control of anyone who is involved. Examples of perils
include fire, theft, storm, Tsunami among others.
ii) Hazard: A hazard is a condition that influences the outcome of a
loss arising from a given peril. Thus a hazard may increase or
decrease the effect of a given peril. Hazards may be classified as
either be physical or moral hazards.Physical hazards relate to the
physical characteristics that may increase or decrease the
likelihood of an event. The examples of physical hazards in marine
insurance will include the nature of the cargo to be insured and the
seaworthiness of the vessel among others.
Task 4: Maritime perils
According to the Marine Insurance Act, Cap 390, Laws of Kenya,

“maritime perils” means the perils consequent on or incidental to the
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navigation of the sea, that is to say, perils of the seas, fire, war, pirates,
rovers, thieves, captures, seizures, restraints and detainments of foreign
governments and peoples, jettisons and barratry, and any other perils
of the like kind or which may be designated by the policy.
i) Perils of the sea

These are the primary causes of loss in the sea. They refer to
accidents and dangers peculiar to maritime activities, such as
storms, waves, and wind; collision; grounding; fire, smoke and
noxious fumes; flooding, sinking and capsizing; and any other
hazards resulting from the unique environment of the sea. They
are extraordinary forces of nature that maritime ventures might
encounter in the course of a voyage. Some examples of these
perils include stranding, sinking, collision, heavy wave action,
fire including smoke, explosion, and high winds.
Peril of the sea is defined in the Hague Visby Rules Art4 (2) (c)
as - perils, dangers and accidents of the sea or other navigable
waters, and provides a defence for the carrier from liability for
loss or damage. In relation to damage to goods on a vessel, must
be perils which could not be foreseen or guarded against as
probable incidents of the intended voyage.
ii) Perils in the sea

These are perils whose source and origin is not natural such as
maritime collisions, sea thieves, pirates, war and other risks that
don’t arise from natural sources. These refer to perils, dangers and
accidents which are not of the sea or other navigable waters but
occur on shore such as at port and terminals Examples include
spillage of oil and other hazardous and noxious substances along
the shore during discharge, impact damage during loading and
offloading.
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Other perils include:
a) Liabilities for loss of, or damage to, cargo, customers'
equipment and ships
b) Loss of, or damage to, equipment including loss due to strikes,
riots and terrorist risks
c) Liabilities arising from errors and omissions including delay
and unauthorised delivery
26.3.04 MARINE INSURANCE CONTRACT

a) explain the nature of marine insurance contract
b) explain the requirements of an insurance contract
c) explain the duties and responsibilities of parties to an insurance
contract
d) explain the historical development of Marine Insurance Act, 1906
e) explain the provisions of the Marine Insurance Act, 1906 which
regulates marine insurance business
f) explain the application of The Insurance (Amendment) Act, 2006
in relation to marine insurance practice
Task 1: The nature of marine insurance contract
Just like any other commercial contract, a marine insurance contract is

an agreement between two parties-the insured and insurer that is
legally enforceable.
i) Parties to a contract
In an insurance contract, there are two parties namely; the insurer
(underwriter) and insured. The insurer is the party who gives
protection against loss. In other words the insurer assumes liability as
and when loss occurs. He is the party who agrees to pay money on
the happening of the insured maritime risk. The insured is the person
facing a particular risk and seeks protection from the insurer by
paying premium. This means that the insured is the one who procures
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the marine insurance policy or becomes the beneficiary through the
marine insurance contract.
A contract of Marine insurance is an agreement between the
insurer and the insured whereby upon payment of a premium, the
insurer undertakes to indemnify the insured for a financial loss.
ii) Types of marine policies

The different types of marine insurance are outlined as below:
a) Cargo Insurance: Cargo insurance caters specifically to the

cargo of the ship and also pertains to the belongings of a ship’s
voyagers.
b) Hull Insurance: Hull insurance mainly caters to the torso and
hull of the vessel along with all the articles and pieces of
furniture in the ship. This type of marine insurance is mainly
taken out by the owner of the ship in order to avoid any loss to
the ship in case of any mishaps occurring.
c) Liability Insurance: Liability insurance is that type of marine
insurance where compensation is sought to be provided to any
liability occurring on account of a ship crashing or colliding and
on account of any other induced attacks.
d) Freight Insurance: Freight insurance offers and provides
protection to merchant vessels’ corporations which stand a
chance of losing money in the form of freight in case the cargo
is lost due to the ship meeting with an accident. This type of
marine insurance solves the problem of companies losing
money because of a few unprecedented events and accidents
occurring.
In addition to these types of marine insurance, there are also various

types of marine insurance policies which are offered to the clients by
insurance companies so as to provide the clients with flexibility while
choosing a marine insurance policy. The availability of a wide array of
marine insurance policies gives a client a wide arena to choose from,
thus enabling him to get the best deal for his ship and cargo. The
different types of marine insurance policies are detailed below:
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a) Voyage Policy: A voyage policy is that kind of marine insurance
policy which is valid for a particular voyage.
b) Time Policy: A marine insurance policy which is valid for a
specified time period – generally valid for a year – is classified as a
time policy.
c) Mixed Policy: A marine insurance policy which offers a client the
benefit of both time and voyage policy is recognized as a mixed
policy.
d) Open (or) Unvalued Policy: In this type of marine insurance
policy, the value of the cargo and consignment is not put down in
the policy beforehand. Therefore reimbursement is done only after
the loss to the cargo and consignment is inspected and valued.
e) Valued Policy: A valued marine insurance policy is the opposite
of an open marine insurance policy. In this type of policy, the value
of the cargo and consignment is ascertained and is mentioned in the
policy document beforehand thus making clear about the value of
the reimbursements in case of any loss to the cargo and
consignment.
f) Port Risk Policy: This kind of marine insurance policy is taken
out in order to ensure the safety of the ship while it is stationed in a
port.
g) Wager Policy: A wager policy is one where there are no fixed
terms of reimbursements mentioned. If the insurance company
finds the damages worth the claim then the reimbursements are
provided, else there is no compensation offered. Also, it has to be
noted that a wager policy is not a written insurance policy and as
such is not valid in a court of law.
h) Floating Policy: A marine insurance policy where only the amount
of claim is specified and all other details are omitted till the time
the ship embarks on its journey, is known as floating policy. For
clients who undertake frequent trips of cargo transportation
through waters, this is the most ideal and feasible marine insurance
policy.
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Task 2: The requirements of a marine insurance contract
For a marine insurance contract to be legally binding or enforceable, it

must certify the essentials of a valid contract just like any other
commercial contract.
i) Intention to create a legal relation

Parties to the contract must be willing to be legally bound. Where
parties have reached an agreement, there may be no contract if
their arrangement was not intended to be legally binding. In
commercial and business agreements, courts assume them to be
intended to be legally binding. Marine insurance contracts are
examples of commercial contracts and are always intended to
create legal relations.
ii) Offer and acceptance

There must be agreement for any contract to be valid. For any parties
to come to a meeting of minds, consensus ad idem, there must be an
offer and an acceptance. An offer is a proposal made by one party
known as the offeror to another called the offeree to sell or buy from
them. An offer must be distinguished from an invitation to treat. An
invitation to treat is an invitation to make an offer. They are also
statements made during negotiations. Advertisements, circulars and
price-marked goods in a shop are invitations to treat. A blank
proposal form and a prospectus in insurance are also in this category.
An offer can be made orally, in writing or by conduct. An offer can
also be made to one person, a group of people or the public as a
whole.
An acceptance may be made orally, or in writing, or by conduct. An

acceptance by conduct occurs where an offer is accepted by being
acted upon. In marine insurance, either the proposer or the insurer
may make an offer in marine insurance. A duly filled proposal form
constitutes an offer which the marine insurer may accept by
confirming cover or issuing the policy or reject. On the other hand,
the marine insurer may give a quotation and this becomes an offer to
the proposer which he may accept by paying premium or decline.
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An acceptance is only effective if the parties agree on the
essential terms of the contract which include nature of risk,
subject matter of insurance, premium payable and duration of cover.
When a marine insurance contract is renewed, a fresh contract is
formed. Fresh offer and acceptance are therefore required. The
renewal notice can be regarded as an offer which the insured may
accept or decline.
iii) Consideration
Consideration is the price for the other party’s promise. Contracts
basically are begged on promises made by each party e.g. in an
insurance contract, the insured promises to pay premium and the
insurer promises to provide indemnity in case of a financial loss.
Consideration signifies some benefit or advantage going to one party
and some loss or detriment suffered by another (Case of Currie vs.
Misa {1875}). In many cases, the detriment to one party is a benefit
to the other and vice versa. Generally, the law will not enforce a
promise not supported by consideration.
In insurance contracts including marine insurance, the consideration
given by the insured in the contract is the premium payable and the
insurer gives a promise to pay claims. A valid insurance contract may
come into force before premium is actually paid provided there is a
firm promise to pay and the promise is regarded as good
consideration as the payment itself. Insurers may stipulate that the
risk will not run until premium is paid. Actual payment however must
be made before insurers incur any liability under the contract.
iv) Formality
Generally, the law does not require contracts to be in any form;
however certain contracts require some type of written
documentation. The importance of a written document is that it
creates certainty on what has been agreed and acts as a warning to
those entering into agreements not to take them lightly.
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Some contracts are required to be under seal for them to be legally
binding e.g. contracts for immovable property. Other contracts must
be in writing e.g. hire purchase agreements, bills of exchange,
transfer of shares in a registered company among others whereas
others must be evidenced in writing or some form of written
document is required. An insurance cover may be given orally but
the policy document is eventually issued. There are a few
exceptional cases of insurance contracts where some formality is
required including marine insurance where the Marine Insurance Act
requires that marine insurance policies must be in writing.
v) Legality
A contract is not valid if its object is illegal and such contract tainted
with illegality is not binding and cannot be enforced in a court of
law. In insurance there is need to distinguish illegal, void, voidable
and unenforceable contracts.
Illegal Contracts
An illegal contract is prohibited by law and may incur penalties. For
example, a contract to commit murder or to sell explosives, whose
intentions are known to be to blow up public facilities, would be
illegal.
Void Contracts
This is a contract where either one of the essential elements of a valid
contract is missing or there is no insurable interest or where there is
fraudulent misrepresentation. It is no contract at all and did not
exist from inception (ab initio). Such contract is not binding and
cannot be enforced by a court of law. An illegal contract is void.
Voidable Contracts
Terms of a voidable agreement allow one party or both parties to
refuse to be bound by the terms of the agreement in certain
circumstances. This means that a voidable contract can be either
enforced or repudiated by one of the parties at its option. In this
respect, non-disclosure of material fact gives an insurer the option to
avoid a contract.
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Unenforceable Contracts
An unenforceable contract is perfectly valid but cannot be enforced
in a court of law if one of the parties refuses to carry out obligations
under it. For example, a contract to undertake an operation with a
doctor may not be enforced if the doctor declines. An unenforceable
contract, however, can be used as a defence to a claim.
A contract may also not be enforceable where the parties have agreed
not to go to court to settle disputes that may arise from it. They may
for instance state that disputes will be settled by arbitration.
vi) Capacity to contract

Capacity relates to the legal right to enter into a contract that is
legally binding. Some categories of persons due to their age, status,
or mental instability have limited contracting capacity i.e. minors,
insane persons and drunken persons.
vii) Marine Insurance Contract/Policy under the Marine Insurance

Act, Cap 390, Laws of Kenya
The Marine Insurance Act, Cap 390, Laws of Kenya, Section 22-24
provides as follows:
Section 22. Contract to be embodied in policy

a) Subject to any other written law, a contract of marine insurance is
Inadmissible in evidence unless it is embodied in a policy in
accordance with this Act.
b) The policy may be executed and issued either at the time when the
contract is concluded, or afterwards.
Section 23. What policy must specify

A policy must specify—
a) The name of the assured, or of some person who effects the
insurance on his behalf;
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b) The subject-matter insured and the risk insured against;
c) The voyage, or period of time, or both, as the case may be, covered
by the insurance;
d) The sum or sums insured; and
e) The name or names of the insurers.
Section 24. Signature of insurer

a) A policy must be signed by or on behalf of the insurer, and if the
insurer is a corporation, the policy may be executed under the
common seal of the corporation or in any other lawful manner.
b) Where the policy is subscribed by or on behalf of two or more
insurers, each subscription, unless the contrary is expressed,
constitutes a distinct contract with the assured
c) Duties and responsibilities of parties to a marine insurance contract
Marine insurance can be bought directly or through the
intermediaries. However, in marine insurance, two parties are
involved in forming the contract i.e. the proposer (buyer) and the
insurer (seller).
- Insured
Under a marine insurance contract, the insured’s duties include
disclosure of all material facts during the negotiation of the
contract. Moreover, the insured’s responsibility is payment of
premium and observing the terms and conditions as well as
warranties stated in the policy.
- Insurer
The insurer’s duty is to indemnify or compensate the insured in
case of loss or damage because of an insured maritime peril. In
addition, the insurers are also involved in risk minimization
and reduction.
Task 4: The historical development of the Marine Insurance Act,

1906
i) Origin of Marine Insurance Act, 1906

Lord Chancellor Herschell first introduced the Marine Insurance
Bill in 1894. After Lord Herschell’s death the new Lord Chanellor,
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Halsbury, presided over a committee on which underwriters, ship
owners and average adjusters were represented. After several
amendments, the Marine Insurance Act 1906 became law as ‘An
Act to codify the law relating to Marine Insurance’ on 21st
December 1906.
ii) Objectives of Marine Insurance Act, 1906

The objectives of the 1906 Act were captured at the International
Law Association conference at Glasgow in 1901 as:
a) To find a mode of bridging over the differences which exist in
marine insurance law in different states
b) A method by which a policy of insurance may have the same
legal effect whether it is made in Belgium, France, Germany,
USA or in England.
The 1906 Act, through its relative clarity and its sheer longevity is
criticized only by the very daring.
iii) Marine Insurance Act, Cap 390

The Marine Insurance in Kenya is governed by the Marine
Insurance Act Cap 390 of the laws of Kenya. Its commencement
date was 22nd November 1968. It is an Act of Parliament to make
provision in relation to marine insurance. The Kenya Act is a
replica of the UK Marine Insurance Act 1906.
Task 5: Provisions of the Marine Insurance Act, 1906 which

regulates marine insurance business
This is the most important piece of legislation in the practice of marine

insurance.
It states the rights and obligations of insurers and insured and sets out
the principles for dealing with different types of claims; marine
insurance Act, 1906 deals on such principles as good faith,
abandonment, total, partial and constructive losses, subrogation and
warranty.
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i) Section 1 – Definition
This section gives the definition of marine insurance as ‘a contract
of marine insurance is a contract whereby the insurer undertakes to
indemnify the assured to the extent agreed against marine loss i.e.
losses incidents to marine adventure’
This definition limits the scope of marine insurance and hence
creates clear boundaries.
ii) Section 2 – Maritime perils and mixed sea and land risks
Under this section, it is provided that “A contract of marine
insurance 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”. Hence there can be allowance by agreement for a marine
policy to be extended to protect the assured against losses on inland
waters or on any risk which may be incidental to any sea voyage.
iii) Section 3 – Maritime perils and maritime adventure
This section defines maritime perils thus; “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, pirates, rovers, thieves,
captures seizures, restraints and detainments of foreign
governments and peoples, jettisons and barratry, and any other
perils of the like kind or which may be designated by the policy.’’
Therefore under a marine insurance contract, it is clear which
perils are covered and any other addition must be stated in the
policy.
iv) Section 4 – Avoidance of wagering or gaming contracts
Under this section, marine insurance contracts are differentiated
from wagering contracts. A policy without insurable interest is
void.This avoids speculative, wagering and gambling contracts.
v) Section 5 - Defines insurable interest
- Subject to this Act, every person has an insurable interest who
is interested in a marine adventure.
- 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
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property, or may be prejudiced by its loss, or by damage
thereto, or by the detention thereof, or may incur liability in
respect thereof.
vi) Section17 - Utmost good faith (Uberrimae fidei)
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.
The contract imposes a duty of utmost good faith as opposed to
caveat emptor;
vii) Section 18 - assured duty of disclosure
There is a duty on the assured to disclose all material facts
relevant to the acceptance and rating of the risk; Non-disclosure
or concealment renders marine insurance voidable by the insurer.
The assured is deemed to know every circumstance which in the
ordinary course of business ought to be known by him.
viii) Section 19 -disclosure by agent effecting insurance
Duty of disclosure lies with the insured, whether insurance is
effected by an agent.
However, a broker has a duty to disclose facts known to him
and those disclosed to him by the assured.
ix) Section 28 -unvalued policies
An unvalued policy is a policy which does not specify the value
of the subject matter insured, but subject to the limit insured,
leaves the insurable value to be subsequently ascertained, in a
manner herein- before specified.
Unvalued policies are not common in marine insurance and
when issued, claims are adjusted like in other classes of general
insurance.
x) Section 29 - floating policy
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.
xi) Section 33 - Warranties
Breach of warranty may be waived or ignored by the insurer.
There is warranty of seaworthiness. A voyage policy provides
that at commencement of the voyage, the ship shall be
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seaworthy for the particular adventure insured. Where a policy
attaches when ship is at port, there is an implied warranty that
she shall at commencement of the risk, be reasonably fit to
encounter the ordinary perils of the sea.
Where policy relates to voyages performed in stages and each
stage requires preparation or equipment, there is an implied
warranty that at commencement of each stage, the ship is
seaworthy in respect of such preparation or equipment for the
purposes of that stage. 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 unseaworthy
xii) Section 50 – Assignment of policies
Assignment is the transfer of one’s interest in a policy of
insurance. This section provides when and how a marine
insurance policy can be assigned. Sub-section 1 provides that
“A policy is assignable unless it contains terms expressly
prohibiting assignment; and it may be assigned either before or
after loss.”
xiii) Section 55-included and excluded losses
This deals with the principle of proximate cause and states that
the insurer is only liable for losses where the most efficient or
dominating cause is a perils insured against. Sec. 55(2) - exclude
loses attributable to the willful misconduct of the assured or
caused by delay and other inevitable losses.
xiv) Section 56 - partial and total loss
- A loss may be either total or partial; and any loss other than
a total loss is a partial loss.
- 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.
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- 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, recover for a partial loss.
xv) Section 60 - Constructive total loss defined

There is a constructive 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.
In particular, there is a constructive total loss –
a) where the assured is deprived of the possession of his ship
or goods by a peril insured against, and -
b) it is unlikely that he can recover the ship or goods, as the
case may be; or
c) the cost of recovering the ship or goods, as the case may
be, would exceed their value when recovered.
xvi) Section 64 - Particular average
Particular average is a partial loss, fortuitously caused by a
maritime peril and which has to be borne by a party upon whom
it falls. Particular charges are recoverable when they are
properly incurred under the duty of the assured in relation to the
risk insured.
xvii) Section 73 - General average contributions and salvage
charges
General average may be in the nature of a sacrifice or
expenditure. There is a general average when, and only when,
any extraordinary sacrifice or expenditure is intentionally and
reasonably made or incurred for the common safety for the
purpose of preserving from peril the property involved in a
common maritime adventure. This allows recovery of
expenditure because of salvage from general average to the
extent that the salvage operations were undertaken for purposes
of preserving from peril the property involved in the common
maritime adventure.
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xviii) Section 79- Rights of Subrogation
The assured is ‘indemnified according to this Act’ when he
receives the indemnity agreed even though he may remain out
of pocket.
Subrogation precludes the assured from recovering from two
sources in respect of the same loss. An insurer can only recover
after providing indemnity to the insured unlike in other classes
of insurance.
xix) Section 80 - Rights of contribution
The Section provides that, ‘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. 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 proportion of the debt.’
Contribution applies in circumstances where two or more

policies are effected by or on behalf of the assured as this is
double insurance.
xx) Section 85 - Mutual Insurance
The Act applies to mutual insurance. This Section states that
‘There is mutual insurance where two or more persons mutually
agree to insure each other against marine losses’. Marine
insurance policy typically covered only ¾ of insured’s liabilities
toward third parties. This liability includes collision with
another ship and wreck removal. In the 19th C, ship-owners
bonded together in mutual underwriting clubs know as
Protection and Indemnity clubs (P & I) to insure the remaining
¼ liability among them. The concept of P & I is central to
marine insurance and has been recognized under this section.
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Task 6: The application of The Insurance (Amendment) Act,
2006 in relation to marine insurance practice
The Insurance Act, Cap 487 of the laws of Kenya is an Act of

Parliament to amend and consolidate the Laws relating to insurance
and to regulate the business of insurance and for connected purposes.
The Act has been amended over the years with the recent
amendments done in 2016.The Act established the Insurance
Regulatory Authority to take up the role of regulating, supervising
and developing the insurance industry. Players of the industry who
are regulated include marine underwriters - insurance companies,
intermediaries and service providers.
i) Insurance companies
One of the main duties of the Insurance Regulatory Authority -IRA
is to license members of the insurance industry. The industry
members including marine insurers are only licensed after meeting
certain requirement prescribed in the Insurance Act. Once all the
requirements such as minimum paid up capital, submission of a
formal application, payment of the appropriate registration fee,
submission of Articles and Memorandum of Association among
others are met, a company will be registered or authorized to
transact business and a license is issued. Registration is then
renewed every year.
ii) Intermediaries
Intermediaries such as insurance brokers and insurance agents are
similarly licensed after meeting certain requirements prescribed
in the Insurance Act. Some of the requirements for registration
include submission of a formal application to IRA, payment of
the appropriate registration fee and minimum paid up capital.
iii) Service providers

Service providers including marine surveyors and loss adjusters are
similarly licensed after meeting certain requirements prescribed in
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the Insurance Act. The requirements for registration will vary with
the nature of services provided.
30.3.05 APPLICATION OF PRINCIPLES OF INSURANCE

describe the application of principles of insurance to marine insurance
operations
The application of principles of insurance to marine insurance

operations
Principles of insurance are specific legal doctrines that govern the

operation of insurance contract and they are important in
understanding the contract. Insurance has evolved and developed
over several hundreds of years. During this period, various practices
have been adopted. Many of them have been upheld by courts of law
or codified by Acts of Parliament. With this legal backing, they have
become what are known as principles of insurance. There are six
principles thus: insurable interest, utmost good faith, indemnity,
contribution, subrogation, and proximate cause.
i) Insurable interest
Insurable interest is one of the most important principles of
insurance. An Insurance contract and by extension a marine
insurance contract is legally binding only if the insured has an
interest in the subject matter of insurance (maritime adventure); it
is this interest which is insurable and not the subject matter itself.
The essentials of insurable interest are:
a) There must be some property, right, interest, life, limb or
potential liability that devolve upon the insured capable of
being covered.
b) The property, right, interest, life or limb, or liability must be
the subject matter of insurance.
c) The insured must stand in a relationship with the subject
matter of insurance whereby one benefits from its safety,
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well-being or freedom from liability and would be prejudiced
by its damage or the existence of liability.
d) The relationship between the insured and the subject matter of
insurance must be recognized at law.
The interest should be capable of being valued financially.

Marine insurance is one of the classes in property insurance. In
connection with property insurance, various relationships
between persons and properties give rise to insurable interest.
Some of these are ownership, bailees, agents, husbands and
wives, and part or joint owners. Unlike other classes of insurance,
the assurer need not have an insurable interest at the time of
effecting marine insurance, but in order to recover under the
marine policy he must be interested at the time of the loss.
Regarding assignment, whereas rights or interests in property
insurance are not assignable, interests in marine insurance
policies are freely assignable.
ii) Utmost good faith

In most commercial contracts, the doctrine of caveat emptor, that
is, let the buyer beware, applies. It is the duty of each contracting
party to ensure that it makes a reasonable bargain. Each party
must examine the product being sold or the service being offered
and, so long as one is not misled, one cannot avoid the contract. It
is not necessary to disclose information not asked for. In
insurance, however, the doctrine of caveat emptor does not apply
because only one party (the insured) knows or ought to know all
about the risk being proposed for insurance and the other party
(the insurer) relies largely on information disclosed by the
insured. A duty, therefore, is imposed on the insured to disclose
fully and truthfully all relevant and material facts about the
maritime risk being proposed for marine insurance. The insurer
has no way of knowing that they have been given all the
information they require. In order to create equity, the law
imposes a mutual duty of disclosure on both parties to the
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insurance contract. Hence, a reciprocal duty is imposed on the
insurer to also disclose all facts material to the contract.
Under the common law, the duty of disclosure of material facts

starts at the commencement of negotiations of a contract and
terminates when there is acceptance. In all classes of property
insurance including marine insurance, disclosure is required
during the negotiation for the contract and at renewal.
iii) Proximate cause

In insurance there are certain causes of loss that are excluded. If
a loss arises out of these excluded perils the insurers are not
liable. For any loss to be payable it must be confirmed that the
peril causing the event is an insured one. The proximate cause of
loss is the peril that is most closely linked to and triggers the loss-
producing event. In marine insurance, it is most closely linked or
connected to the loss-producing maritime event. Before an
insured can recover from insurers for the loss one has sustained, it
is necessary to determine the cause of the loss. In marine
insurance, the cause may be an:
- Insured peril (such as collision of vessels),
- Excepted peril (such as wear and tear), or
- Uninsured peril, (these are perils which are not mentioned at all
in the policy).
The proximate cause of a loss is the cause most closely allied with
the loss not necessarily in time but in effect. This means that it need
not necessarily be the cause that operated first or last because it may
have been but a link in the chain connecting the cause with the
result. The event must be a natural consequence of that cause. It
must also be connected with the cause by a chain of circumstances
from one cause to the other. In other words, the proximate cause is
the dominant cause.
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iv) Indemnity
Indemnity is defined as placing the insured in the same financial
position after a loss as one occupied immediately before the loss.
It is the exact amount of financial loss suffered by the insured at
the happening of an event. It controls the amount that the insured
should receive if a loss occurs.
The insurance policy gives the insurer the right to decide on the
mode of providing indemnity unless the policy is arranged on
reinstatement basis. The options from which an insurer may choose
include cash, repair, replacement, and reinstatement. Calculation of
indemnity amount depends on the nature of the property insured and
the class of insurance involved.
In Marine Insurance, the Marine Insurance Act Cap 390 provides for
both valued and unvalued policies. The insurable value in an
unvalued policy must subsequently be computed according to the
formula in the Act. In a valued policy, the insurable value is mutually
agreed between the assured and the insured. This means that in both
cases, there is a fixed insurable value operative from the
commencement of the risk which is unaffected by subsequent market
fluctuations. It corresponds to the sum insured.
v) Subrogation
Subrogation is defined as the right of one person, having indemnified
another under a legal obligation to do so, to stand in the place of
that other person and avail himself of all the remedies and rights of
that other person whether already enforced or not. Subrogation means
that one has to surrender his right to someone else. Insurance
practice does not allow the insured to profit from a loss. As it was
stated earlier, the insurance company tries to bring the insured to the
original position before the loss. The principle is in the area of law
which has become known as the law of restitution.
In marine insurance, subrogation rights are only exercised after the

marine insurers have indemnified the Insured.
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vi) Contribution
Contribution is defined as the right of an insurer to call upon others
similarly but not necessarily equally liable to share the cost of an
indemnity payment.
In some instances, there could be several marine policies or more
than one marine insurance policy covering a particular loss for a
variety of reasons. This may be done either consciously/
unconsciously. In each case, insurers have to ensure that the insured
is only indemnified and no more than full indemnity is received.
Where there are two marine policies or more covering the same
subject matter, insurers will share the loss hence the operation of
the principle of contribution. The principle of ccontribution is a
corollary of indemnity. It ensures that the insured does not gain
unduly from the insurance process. It enables the total claim to be
shared in a fair way. The crucial point is that if an insurer has paid a
full indemnity it can recoup an equitable proportion from the
other insurers of the risk. When a loss occurs, the principle stipulates
that the various insurance companies covering the subject
matter must come and contribute ratably towards the loss.
Contribution will arise if:

a) There are at least two contracts of indemnity covering the same
subject matter of insurance;
b) All the policies are in force at the time of loss;
c) The policies cover the same interest; or
d) The policies cover the same peril or perils that caused the loss.
The basis of contribution is that marine insurers may make

contributions based on a rateable proportion of the sum insured.
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26.3.06 MARINE INSURANCE UNDERWRITING

a) explain the meaning of underwriting
b) describe the documentation in marine insurance
c) explain the types of marine cargo insurance covers
d) describe the Institute Cargo Clauses (ICC)
e) explain the categories of risks insured under hull and machinery
f) explain types of covers in hull and machinery insurance
g) explain types of policies in hull and machinery insurance policies
h) explain Protection and Indemnity covers
Task 1: The meaning of underwriting
Proposers for marine insurance present their various maritime risks to

be insured by the marine insurers. By way of evaluation of the
presented maritime risks, the marine insurers decide whether to accept
the proposed maritime risks or reject based on their assessments.
Moreover, if accepted, they decide the premium rate and conditions to
apply.
i) Underwrite
To underwrite means to asses or evaluate a risk which is proposed
for insurance. It means to assess the information presented by the
proposer to make an informed decision on acceptance. The insurer
and in this case the marine insurer will assess the physical and
moral hazards with respect to the proposed maritime risks. Among
the physical features of the maritime risks to be assessed will
include the sea worthiness of the vessel and the nature of cargo to
be insured. Others include hazards such as weather, efficiency of
port of origin and destination including theft incidents, risk of the
ship sinking, and piracy prone areas.
ii) Underwriter
The origin of the word ‘‘underwriter’’ is from the Lloyds market
where someone signs and stamps at the bottom of a broker’s slip to
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indicate the percentage of the business being accepted on behalf of
the syndicate.
An underwriter is the one who assesses or evaluates a given risk
and makes a decision on acceptance. The underwriter is one who
assesses a risk and decides whether to accept it or reject and if
accepted, decide the rate of premium to charge and the terms and
conditions to apply.
iii) Underwriting
It is the process of assessing a risk and deciding whether to accept
it or reject the proposal and if accepted, decide the rate of premium
to charge and the terms and conditions to apply.
The process involves a close look at all the physical characteristics
of the maritime risks presented for cover. Additionally, the moral
hazards – human aspects that may influence the occurrence of the
insured event such as tendency to exaggerate claims or to lodge
fraudulent claims must be scrutinized.
iv) Risk assessment

Risk assessment is the process of gathering data and synthesizing
information to develop an understanding of the risk of a particular
enterprise. To gain an understanding of the risk of an operation,
one must answer the following three questions: i) what can go
wrong? ii) How likely is it? iii) What are the
impacts/consequences? Qualitative answers to one or more of these
questions are often sufficient for making good decisions. However,
as managers seek more detailed cost/benefit information upon
which to base their decisions, they may wish to use quantitative
risk assessment (QRA) methods (Figure 1).
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Figure 1: The elements of Risk Assessment.
Source: Author
To use a systematic method to determine risk levels, the Risk

Assessment Process is applied. This process consists of four basic
steps:
i) Hazard Identification
ii) Frequency Assessment iii) Consequence Assessment, and
iii) Risk Evaluation.
Insurance companies use a methodology called risk assessment to

calculate premium rates for policyholders. Using software that
computes a predetermined algorithm, insurance underwriters gauge the
risk that you may file a claim against your policy. These algorithms are
based on key indicators about you and then measured against a data set
to weigh risk. Insurance underwriters carefully balance the insurance
company’s profitability with your potential need to use the policy.
When an application is received by the insurance company the
administration department will set up the application on the company’s
underwriting system. This system can be web base, electronic or in
some cases paper. At this point the underwriter will have the task to
assess the risk and classify it according to its likelihood of a loss. He
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will proof if the risk should be accepted and if so how the policy
should be issued. Insurance companies cannot assume that every
proposed insured object will represent an average likelihood of loss.
For instance, motor insurance has different tariffs depending on the
type of car, experience of the driver, location of the risk, usage of the
car, etc, reflecting the different likelihood of suffering a claim. The
process of identifying and classifying the degree of risk represented by
a proposed insured object is an important aspect of underwriting or risk
selection. To assess the risk the underwriter uses relevant information
contained in the application form to screen the object to be insured
from possible risks. For instance, the location of a building in a non-
earthquake prone area will exclude the earthquake exposure. A certain
construction code will allows the exclusion of the perils created by
winds below certain strength. The underwriter will also use databases
to check on the risk exposure, possible past claims, or declined
applications in the past.
Task 2: The documentation in marine insurance
In marine insurance, the insured makes a proposal to insure and the

insurer accepts the proposal. However, before the contract of marine
insurance is concluded, there are a number of steps in the process
where certain documents are completed and filed or sent to the
insured.
i) Marine cargo declaration forms

This is a document which is used mainly by Cargo Marine
underwriters to gather the underwriting information from the
proposer. The document is issued to the proposer who will
complete and sign accordingly. It contains the following among
others:
a) The name and address of the insured;
b) Description of goods to be insured;
c) Value of insurance;
d) Name of the carrying vessel etc.
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ii) Proposal forms
A proposal form is a document, which is drafted by the insurer and
issued to the proposer for the purposes of extracting underwriting
information from the proposer. It is used to collect or obtain and
record material facts or sufficient information that is required by
the underwriter in assessing the nature of the risk being proposed
for insurance.
Not all contracts of insurance require the use of a proposal forms

and hence in other cases, the proposal form is dispensed with for
instance. In marine insurance a broker’s slip is used in the UK
market while in the Kenyan market, a marine declaration form or
slip is used particularly for cargo risks. However, proposal forms
are used for hull, small pleasure crafts and minor risks.
iii) Brokers slip

It is also known as the placing slip and is submitted by an
insurance broker to underwriters. Its origin is the Lloyd’s market
in the UK and it contains the particulars of the risk proposed for
insurance. The underwriter signifies his acceptance by initialing
the slip and indicating on it the share of the insurance he will take.
The document is commonly referred to in the Kenyan market as a
Risk note. In addition, the risk note will contain a detailed
summary of the cover required as well as the clauses which should
be attached. Though it is signed by the broker, it takes the place of
the proposal form and forms the basis of the contract of insurance.
iv) Policy documents

A policy document is a document that records the contract
between the insured and the insurer. It is not the contract itself but
the evidence of the contract because the contract existed when the
insurer accepted the offer by the insured. In case of a dispute
between the parties to the contract i.e. the insurer and the insured,
the courts will refer to the policy document. The courts usually
assume that the document shows the intention of the parties to the
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contract unless evidence of discrepancies can be shown between
the policy and the contract.
v) Certificate of Insurance
This is a document that is issued where it is a statutory
requirement especially where the insurance cover is compulsory
e.g. under the (Motor Vehicles Third Party Risks) Act 1989, laws
of Kenya. In marine insurance certificates of insurance are issued
in open cover policies only.
vi) Claim Forms

This is a document in form of a questionnaire which is generated
by the Insurer and given to the insured to complete. It helps the
insurer to extract details or information relating to the loss from
the insured which will facilitate the processing of the claim.
vii) Discharge Forms

This is a document which is normally sent by insurers with the
cheque payment to the insured to be signed and returned to the
insurers. It acts as a receipt for the cheque payment and it
absolves the marine insurer from any further responsibility for
this particular claim.
Task 3: Types of marine cargo insurance covers
All marine policies are either valued or unvalued polices. A valued

marine cargo policy is that which specify the agreed value of the
subject matter of Insurance. On the other hand, an unvalued policy
does not specify the value of the subject matter. All marine insurance
policies, whether valued or unvalued, come under the heading of one
of several ‘types’ indicated by the typed or written wording in the
marine policy.
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i) Time policy
This is a marine policy that insures the subject matter for a period
only. It is issued for a fixed period of time that does not usually
exceed 12 months.
ii) Voyage policy

This is a marine policy, which insures the subject matter from one
place to another irrespective of the length of time taken. The
policy in respect of cargo can be from the warehouse of departure
to the warehouse of arrival.
iii) Mixed policies
The policy covers the subject matter for both a voyage and a period
of time thereafter (as a vessel for a voyage and period in port after
arrival).
iv) Open Cover Policy (Floating policy)
This is a general marine policy which covers cargo. The policy is
not issued to cover a specific cargo but it is issued in general terms
and contains the following details: perils covered, rate to apply,
nature of cargo to be covered etc. It covers a number of shipments
to be declared later.
Task 4: The Institute Cargo Clauses (ICC)
The scope and extend of marine cargo insurance is governed by the

Institute Cargo Clauses. There are two main types of Institute Clauses
- Institute Cargo Clauses – Cargo and Institute Time Clauses (ITC)-
Hull.
i) Definition of Institute Cargo Clauses

Institute Cargo Clauses are clauses which are introduced into a
marine cargo policy to indicate the scope/extent of cargo cover
under a cargo policy. They are a set of terms for cargo insurance
policies voluntarily adopted as standards terms by many
international marine insurance organizations.
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ii) Origin of Institute Cargo Clauses
The Technical and the Clauses Committee of the Institute of
London Underwriters draft the Institute Clauses and they are
adopted for use virtually in the world over by all insurers. There
are, however, American and Norwegian clauses which are
somewhat different from these clauses but essentially are alike.
Doubtless, this type of uniformity is desirable because marine
insurance relates to international trade, that is, trade between
countries all over the world involving different modes of transit. It
will be remembered that the purpose of marine insurance is to
facilitate trade and this uniformity further affirms this.
iii) Principal Cargo Clauses

There are three principal institute cargo clauses that is; Institute
Cargo Clause A, B and C. All other cargo clauses are constructed
around them. The cover they provide is minimal in Clauses C,
increase at Clauses B, and is maximum at Clauses A.
- Institute Cargo Clause C (ICC C) - This set restricts cover to
the effect of major perils (Perils of the sea) i.e. fire or
explosion, stranding, sinking or capsized, collision or contact
of vessel, overturning or derailment of land conveyance.
General average and jettison are covered while water damage
for instance, would not be recoverable unless proximately
attributed to the listed major events. Despite its seeming
limitations, this type of coverage remains adequate for many
established trades in low value cargoes, principally of a raw
material nature and destined for future processing such as;
mineral ores, steel billets and unfinished steel products.
- Institute Cargo Clause B (ICC B) - This set incorporates all C
clauses coverage with certain additions, most notably water
damage caused by entry of sea, lake or river water as well as
loss of any package lost overboard or dropped during loading
and unloading. Typical cargoes suited to this cover would
include robust items and other goods normally resistant to more
general types of damage such as; heavy machinery, contractors
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equipment, second hand vehicles, certain steel products, base
metals and raw cotton.
- Institute Cargo Clause A (ICC A) - This covers against all risks
of loss or damage to the subject matter insured except as
excluded by the provision of clauses 4, 5, 6 and 7 of the
clauses. In line with the other all risks covers, the key to
understanding this is in the exclusions. It provides the widest
of the three covers, and insures against All Risks, that is; all
loss or damage arising from fortuitous causes, which would
include breakage, scratching, denting, chipping, theft, pilferage
and non-delivery, contamination; as well as types of water
damage, including rainwater.
Task 5: The categories of risks insured under hull and machinery
The risks insured under marine hull and machinery insurance range
from losses like where the vessel is stolen, the risk of damage to the
vessel by maritime perils such as storm and third party liability risks
associated to the hull.
i) Loss
In a maritime adventure, the interested parties may suffer loss. For
instance, the vessel owner may suffer the loss of the vessel by way
of theft or sinking; the cargo owner may suffer the loss of cargo
and freight while the financier of the vessel may suffer the loss of
security for the mortgage on the vessel and risk that further
repayments will not be made.
ii) Damage
Transit by sea exposes the vessel to various risks such as collision
or fire and explosion that may cause damage to the vessel or
damage to the cargo in transit. Ship-owners will wish to protect
themselves against fortuitous damage to actual structure of the
ship. They will need to insure the power units such as the main and
auxiliary engines, plus the mechanical gear like cranes and anchors
against the perils of the sea among other main traditional perils.
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iii) Third Party Liability
Liability risks reimburse the purchaser for financial damages, sums
that must be legally paid by them after causing wrong to another
party. The damages may be in respect of loss or physical damage
to property, injury or death of people, or violation of someone’s
rights. In the event that there is loss of or damage to the vessel, the
vessel owner, is likely to face not only loss of or damage to their
assets (ship) but also liability to third parties. This can take the
form of damage to or loss of third party’s vessel, damage to third
party cargo and loss of life or injury.
Task 6: Types of covers in hull and machinery insurance
All marine insurance policies/covers including hull, whether valued or

unvalued, come under the heading of one of several ‘types’ indicated
by the typed or written wording in the marine policy.
i) Time policy
A time marine policy will insure the vessel for a period only. It is
issued for a fixed period of time that does not usually exceed 12
months.
ii) Voyage policy

This is a marine policy, which insures the vessel from one place to
another irrespective of the length of time taken that is for a
particular voyage.
iii) Building risk policy (Hull Construction)

This is a marine hull policy, which insures a vessel in course of
building, irrespective of the length of time taken; it is not a time
policy.
iv) Institute Time Clauses (ITC)

In the case of ships, the normal standard hull policy cover is set out
in the Institute Time Clauses – Hulls. Marine Hull Insurance
covers loss or damage to hull and machinery. The hull is the
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structure of the vessel. Machinery is the equipment that generates
the power to move the vessel and control the lighting and
temperature system such as boiler, engine, cooler and electricity
generator. Time Clauses covers for a specific period usually 12
months. The clauses provide cover on a named peril basis, which
means that protection is only granted against perils specifically
named. As the nature and degree of risks which the insurer run
vary according to the kind of vessel, there exist a number of
categories in the Time Clauses including: Institute Time Clauses
(Hull), Institute Time Clauses (FPA), and Institute Time Clauses
(Total Loss Only).
Task 7: Types of hull and machinery insurance policies
There various types of hull and machinery insurance policies

depending on the maritime insurance needs of the proposer. The types
include loss of hire polices and Charterer’s legal liability policies
among others.
Hull and machinery policy

This is the primary cover for ships that is, insurance covering loss or
damage to the hull and machinery of a vessel and insurance of ship
owners’ various interest and liabilities. It covers physical risks to the
insured vessel, machinery and provisions for liability risks.
Loss of hire policy

The loss of hire cover protects the ship-owner from a daily loss of
income arising from physical damage to the vessel in a wide range of
situations.
The cover can be extended to respond to loss of hire as a result of war
or war like circumstances, and for non-physical blockage due to
intervention by a state power. Detention due to piracy is not covered
under this policy; however, Gard has a specific product for these risks.
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Charterer’s legal liability
A type of marine insurance designed to provide coverage for the
liabilities including those of care, custody, and control (CCC)
assumed by a party chartering a vessel when the vessel's operation
remains in the control of the vessel's owner. Under a charter
agreement also known as a charter party, the chartering party may
occasionally agree to be responsible for some of the liabilities
associated with the voyage like damage that the ship might incur
while loading and unloading the charterer's cargo or the loss of the use
of the vessel when it is involved in a collision. The insurance normally
covers damage to the vessel and may provide coverage for other types
of damage or injury for which the charterer becomes legally liable.
Task 7: Protection and Indemnity covers
The origin of P & I Clubs lies in the concept of mutual insurance and
confined to marine insurance world. It is a form of self -insurance
whereby a group of potential maritime insured decide to insure each
other in a mutual or pooled arrangement for the part of liability
collision risk not covered by the marine insurer.
i) Protection
The coverage offered by the protection and indemnity (P & I)
clubs has developed over the last 150 years to mirror the increasing
liabilities faced by the shipowners as part of their business. The
very first Protection Club opened for business in 1854. The
managers of this first club were already in mutual insurance
business as they managed Hull Clubs, and identified a customer
need and developed a product to suit this need. Protection clubs
mainly dealt with liability risks relating to the ship such as crew
injury, salvage, and the ¼-collision liability, which is normally
excluded under the hull and machinery policy.
ii) Indemnity
Indemnity Clubs came up to deal with ship owners’ liability for
loss or damage to cargo. The clubs appeared first in the 1870s
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having been triggered by interest in the provision of cover for such
liabilities which were not provided by the protection clubs. In later
developments in this area saw the merger of the two mutual
liability covers to be what is today known as Protection and
Indemnity Clubs. The origin of this form of insurance for marine
risks was the dissatisfaction with the commercial insurance
offerings available in the eighteenth century.
26.3.07 MARINE CARGO CLAIMS

a) explain the meaning of a marine insurance loss and claim
b) describe the types of marine cargo losses
c) explain the types of claims in marine cargo insurance
d) explain the documents used in marine cargo claims
e) describe the procedure for processing marine cargo insurance
claims
f) explain the role of marine cargo surveyors
Task 1: Meaning of a marine insurance loss and claim
A Contract of marine insurance is an agreement between the insurer

and the insured whereby in return for premium, the insurer undertakes
to indemnify the insured against a maritime financial loss. Cargo
claims processing and settlement are pertinent as the only time the
insured is able to test the quality of the marine cargo policy he/she has
purchased is when they make a claim. The marine insurer makes a
promise to indemnify the insured subject to the terms and conditions
of the policy, against loss or damage which the insured may sustain or
liability, which they may incur. Marine insurers must deal with claims
in a speedy and fair manner because efficiency in claims handling and
management enhances the reputation of the marine underwriter and is
the best form of marketing and advertisement. Any analysis of marine
insurance claims involves answers to questions of; cause of loss or
damage and assessment of loss or damage that constitute a claim.
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i) Definition of marine loss
A marine loss is the occurrence of an insured maritime event
against which marine cover has been taken, which gives rise to a
financial detriment to the insured. For instance, the vessel owner
may suffer the loss of the vessel by way of theft; the cargo owner
may suffer the loss of cargo and freight while the financier of the
vessel may suffer the loss of security for the mortgage on the
vessel and risk that further repayments will not be made.
ii) Definition of marine claim

A marine claim is a request by the insured to the marine insurer to
be compensated under the marine insurance policy following a
loss. The policyholder presents the claim to the marine insurer to
be indemnified.
Task 2: The types of marine cargo losses
A marine loss is the occurrence of an insured maritime event against

which gives rise to a financial disadvantage to the insured. Marine
cargo losses can be of various forms such as total loss, partial losses or
general average losses. Each of the above is discussed in detailed
below:
i) Total loss
In marine cargo insurance, a loss is either actual total loss or
constructive total loss. There is an actual total loss where the
subject matter insured is destroyed, or so damaged as to cease to be
the kind insured, or where the assured is irretrievably deprived
thereof. Actual total loss in cargo insurance arises where goods
are:
- destroyed; or
- when by reason of damage, they are no longer the kind of a
thing insured; or
- Where the assured is irretrievably deprived thereof.
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If a ship is missing, the Marine Insurance Act, 1906, provides that
if no news has been received after the lapse of a reasonable time,
she is presumed to be an actual total loss by a marine peril. In this
respect, cargo on board the ship is also deemed to be an actual total
loss.
Constructive total loss in cargo claims arises when all or any of the
following occur:
a) actual total loss of goods appears unavoidable
b) when the goods could not be prevented from actual total loss
without expenditure which would exceed their value
c) Where the assured is deprived of the possession of his goods
and it is unlikely that he can recover them or the cost of
recovery would exceed their value when recovered.
d) Where the cost of repairing the damage and forwarding the
goods to their destination would exceed their value on arrival.
e) Where there is a loss of voyage, that is, where there is a
practical and effective impossibility of ever sending the goods
to their port of destination.
i) Partial losses
A partial loss is any loss other than a total loss. It is either a
particular average loss or general average loss.
ii) General average

General average loss is defined as a loss caused by or directly
consequential on a general average act. It includes a general
average expenditure as well as a general average sacrifice. There is
a general average act where any extraordinary sacrifice or
expenditure is voluntarily and reasonably made or incurred in time
of peril for preserving the property imperiled in the common
adventure.The difference between general average and particular
average is that general average is a voluntary and deliberate loss
whereas particular average is fortuitous or accidental. General
average losses are borne rateably by all the interests who benefit,
but particular average rests where it fails, and is recoverable from
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the insurer of the particular subject matter lost or damaged. A
general average loss may include expenditure, but particular
average can only be loss or damage of the subject matter insured
caused by an insured peril, and would not embrace any expenses.
iii) Particular average

Particular average is a partial loss of the subject matter insured,
caused by a peril insured against and which is not a general
average loss. It is therefore a fortuitous partial loss caused by a
peril insured against. Particular average loss to cargo may be
damage by sea water following heavy weather or following
stranding of the carrying vessel or there may be loss of part of the
cargo by an insured peril.
iv) Expenses
In marine insurance, there are three types of expenses: particular
charges, sue and labour charges and salvage charges.
a) Particular charges are defined by under Marine Insurance Act
1906 as expenses incurred by or on behalf of the assured for
safety or preservation of the subject matter insured. They are
expenses other than general average and salvage charges. In
order to avert a greater loss which would otherwise fall on the
policy, particular charges may be incurred, and they are then
recoverable as a loss by an insured peril.
b) Sue and labour charges – This is an expenditure for which
may be liability arise under the Sue and Labour Clause in
cargo and hull policies. The clause binds the insurers to pay
any expenses incurred by the assured or his agents in
preventing or minimising loss or damage to the subject matter
insured caused by an insured peril. Such expenses, when
properly and reasonably incurred, are payable irrespective of
percentage and even in addition to a total loss, thereby
emphasising the supplementary character of the clause. Sue
and labour charges provide the only instance where an insurer
may be liable for more than the sum insured in respect of one
casualty.
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c) Salvage charges – These are charges recoverable under
maritime law by a salvor independently of contract. Maritime
salvage is the remuneration or reward payable according to
maritime law to salvors who voluntarily and independently of
contract render services to rescue or save property at sea, such
as a ship, her cargo and freight at risk.
v) Extra charges
In maritime business, these are other extra charges which are
incurred in providing or supporting a claim. They include survey
fees, sale charges, and expenses of inspection among others.
Task 3: Types of claims in marine cargo insurance
A marine cargo claim is a request by the insured to the marine insurer

to be indemnified or compensated under the marine insurance policy
following an occurrence that is insured under a marine cargo policy.
There are various types of claims in marine cargo insurance as detailed
hereunder.
i) Theft/Pilferage
Theft or pilferage is common with solid cargo, liquids and
portable. While theft may refer to the act of depriving a person of
their cargo, to pilfer is to steal in small quantities. Commonly done
on board conventional cargo ships during loading or discharge.
The proximate cause will include damage to the carrying
containers or packages leading to undue exposure of the contents
among others.
ii) Damage
This is by far the most common of all Marine cargo losses as it can
arise at any stage in the course of transit. It may occur on the
vessel itself, at the port of discharge or during the inland transit
when the mode of carriage changes. The cargo is shifted from the
carrying vessel to various land conveyances using all sorts of
equipment, warehousing, inspection for customs purposes, etc.
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iii) Short landing
Short landing is where cargo shipped is not discharged at the port
of destination.
The cargo may have been discharged at a preceding port
inadvertently (or deliberately) or dropped into the sea by the
Stevedores. The ship may also over-carry the cargo beyond the
designated port of Landing etc.
iv) Sellers’ interest contingency

In FOB/C & F trading, the seller is technically relinquishing
control of the goods, without personal possession of insurance
protection, despite which he must still ride out other uncertainties
such as; deferred payment of the contract price, non- acceptance of
the buyer, faulty documentation, and failure to meet contract
specification or delivery timetable, or unsatisfactory condition of
the goods on arrival. A seller’s interest contingency policy will
specify full normal conditions of cover opposite to the type of
shipment in question.
Task 4: The documents used in marine cargo claims
Documentation forms a very important basis of marine cargo claims.

Other than the issues of liability, documentation will determine
whether a claim will be honoured or repudiated by marine
underwriters. Moreover, proper documentation will determine how
first the claim will be processed.
i) Original insurance policy

This is the document, which provides evidence that there exists a
contract of marine insurance between claimant and marine
insurance company in respect of the loss under claim.
ii) Certificate of marine insurance

This is a document that used in marine open cover policies in place
of the policy document as evidence that there exists a contract of
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marine insurance between the claimant and marine insurance
company in respect of the loss under claim.
iii) Original shipping invoice

The invoices show the cost or value of the goods and the
applicable terms of sale (whether FOB, CIF or C & F). This
enables the underwriters to establish whether there is
underinsurance or over insurance.
iv) Original of bill of lading

The Bill of Lading has three main functions. Firstly, it is a
contract of carriage. Secondly it is a receipt of the goods
confirming that the issuer of the Bill of Lading has received the
goods from the shipper. Thirdly it is a document of title to enable
the bearer to take the goods on presentation of the document at the
port or destination.
v) Cargo manifest
This is a document which list all the goods shipped that is: a
description of the contents, weight, volume and marks of all
packages. It is normally drawn up by agents at the ports of loading
from the bills of lading.
vi) Original Inland Carriers Delivery/Consignment Notes

The Port Authorities are the custodian of all imports prior to inland
delivery and thus they issue these documents to signify the
condition of the cargo at the time of arrival from the overseas
vessels. Shipping Agents recognize the same documents and
claims are normally lodged and paid on the basis of the documents.
vii) Copy of Custom Declaration Form/Custom Entry

This is a document that indicate information on imported or
exported goods , prepared by a customs broker on a prescribed
form called entry Form or duty entry Form, and submitted to the
customs . It states the customs classification number, country of
origin , description , quantity , and CIF value of the goods, and the
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estimated amount of duty to be paid. If upon examination by a
customs officer the entry is verified as a correct or 'perfect entry,'
the goods in question are released (on payment of duty and other
charges , if any) to the importer, or are allowed to be exported.
viii) Original Port Examination Vouchers and Defective Package

Receipts.
Port Authorities are the custodians of all imports prior to inland
delivery. They issue these documents to signify the condition of
the cargo at the time of arrival from the overseas vessels.
Shipping Agents recognize the same documents and claims are
normally lodged and paid on the basis of the documents.
ix) Pre-shipment Survey/Inspection report

This is a survey report by marine surveyors on export goods done
prior to loading a ship indicating whether the goods conform to
the contract of sale.
x) Short-Landing Certificate/Confirmation
The certificate is issued by the Shipping Agents and confirmation
is issued by the Port Authorities. For short landing claims this
documents are a must and the underwriters may use them for
recovery under subrogation from the shipping carriers.
xi) Copies of Third Party Recovery Correspondences

Correspondence holding carriers and/or bailers liable for the loss;
it is the policy of the underwriters to pursue recovery under
subrogation rights after paying a marine loss. For this to succeed,
the consignee is required under the policy, to initiate a valued
claim against their contracted carriers before the underwriters take
over. Some surveyors may undertake recovery of loss if
requested by underwriters.
xii) Completed and Signed Claim Form

It is a document in form of a questioner that is developed by the
insurer and issued to the insured. It helps the insurer to extract
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details relating to the loss from the insured. The insured is under
duty to disclose all material facts relating to the loss hence utmost
good faith applies.
Task 5: Procedure for processing marine cargo insurance claims
The procedure of handling marine cargo claims will be determined by

the type of cover, the amount of loss and the nature of loss. In general
however, the following detailed procedures apply.
i) Notification
This is the first step when intimating a claim. It can be done
through various means including: Telephone, Fax, e-mail, SMS,
Personal visit to Insurer’s office or insurer’s website. The claim
form contains the following details among others: Insured’s
details, details of subject matter, and estimated value of loss.
Notification enables the insurers take steps to investigate, assess or
adjust, minimize the insurer’s exposure/loss and enable them to
obtain information on possible recoveries.
ii) Claims review

This is where the insurer will compare the details in the claim with
those in the proposal form for the purposes of confirming, whether
the cover was valid at the material time, existence of insurable
interest, whether the sum insured was adequate and whether the
insured has complied with the policy conditions.
iii) Claims investigations

Claims involving small amounts can be adjusted internally by
claims handlers. For big claims, insurers may appoint experts to
deal with the case and give an opinion and these experts include
marine cargo surveyors and loss adjusters.
iv) Claims negotiation

This arises where there is dispute in the amount payable. Most
times the loss adjusters will negotiate on behalf of the insurers. At
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times the negotiations may involve the insurance brokers and
agents.
v) Claims settlement
This is the final stage in the claims process which involves the cash
payment. Prior to settlement, the issue of liability and quantum
must be addressed.
Task 6: The role of Marine Cargo Surveyors
Marine Cargo Surveyors play a critical role in the management of

cargo risks. They are involved in cargo surveillance, pre-shipment
inspection supervisions and investigation of losses among other
functions.
i) Cargo Surveillance
Insurers in Kenya have constituted a cargo surveillance scheme
involving inspection of cargo at entry points particularly
Mombasa, JKIA, and inland container freight stations. Further
inspections are carried out during custom verification and on
delivery at destinations. If a loss is noted, liable party is identified
and notified immediately to protect insurers’ recovery rights under
subrogation.
ii) Pre-shipment Supervision

This involves inspection prior to loading export goods onto a ship
performed by surveyors in order to verify that the goods conform
to the contract of sale, and that the invoice price is fair. It is
normally performed by privately engaged Surveyors by Marine
Insurers.
iii) Post-shipment Supervision

This involves inspection prior to offloading of import goods from a
ship performed by Surveyors in order to verify that the goods
conform to the contract of sale, and that the invoice price is fair.
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Privately engaged surveyors by marine insurers or cargo owners
normally perform it.
iv) Investigation of Losses/Damages

Losses are investigated to establish the causes, nature and extent of
damage to import or export cargo. Marine insurers are interested in
establishing causes of loss so as to ascertain whether the perils
insured according to the ICC clauses attached.
26.3.08 HULL AND MACHINERY CLAIMS

a) describe types of hull and machinery losses
b) explain the significance of the documents used in hull and
machinery claims
c) describe the procedure for processing hull and machinery
insurance claims
d) describe the role of hull and machinery surveyors and adjusters
Task 1: Types of hull and machinery losses
A claim may lie upon a marine hull and machinery insurance policy on
the ship when there is the operation of the insured perils. The cover for
loss of the ship or for cost of repairing damage to the ship applies only
when such loss or damage is proximately caused by a peril specified.
Hull and machinery claims processing and settlement are pertinent as
the only time the insured is able to test the quality of the hull and
machinery policy he/she has purchased is when they make a claim.
The marine insurer makes a promise to indemnify the insured subject
to the terms and conditions of the policy, against loss or damage which
the insured may sustain or liability, which they may incur. Marine
Insurers must deal with claims in a speedy and fair manner because
efficiency in claims handling and management enhances the reputation
of the marine underwriter and is the best form of marketing and
advertisement. Any analysis of marine insurance claims involves
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answers to questions of; cause of loss or damage and assessment of
loss or damage which constitute a claim
i) Total loss
A total loss is either actual total loss or constructive total loss.
a) Actual total loss

There is an actual total loss when a vessel is destroyed or is so
seriously damaged as to cease to be ship, or when the ship-
owner is irretrievably deprived of her, for example, she may
sink in very deep water and cannot be saved. If a ship is
missing, the Marine Insurance Act, 1906, provides that if no
news has been received after the lapse of a reasonable time, she
is presumed to be an actual total loss by a marine peril.
b) Constructive total loss
There is a constructive total loss when the subject matter is
reasonably abandoned because:
- Actual loss of ship appears to be unavoidable.
- When the ship-owner is deprived of his ship and her
recovery is unlikely.
- When the cost of recovery and repair of damage would
exceed the ship’s insured value.
ii) Partial losses

A partial loss is any loss other than a total loss. It is either a
particular average loss or general average loss.
iii) Particular average

Particular average is a partial loss comprising damage to the ship
caused by a fortuity and which is not a general average loss. It is
therefore a fortuitous partial loss caused by a peril insured against.
Particular average loss to the ship may be damage as a result of
collision, grounding, stranding and fire among other perils.
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iv) General average
General average exists independent of insurance. There is general
average act when any extraordinary sacrifice or expenditure is
intentionally and reasonably made or incurred in time of peril for
preserving the property imperiled in the common adventure.
General average embraces the losses suffered or expenditure
incurred by other interests as well as the ship and thus a ship-
owner’s claim upon his insurance on his ship may concern:
- General average sacrifice being damage to the ship voluntarily
sustained for common safety and preservation of the adventure.
- General average expenditure incurred by the ship-owner.
- General average contribution, being what the ship-owner his to
pay towards sacrifices suffered and expenses incurred by other
parties.
v) Expenses
In hull and machinery insurance, these will include, salvage
charges, sue and labour charges and third party liability.
vi) Extra charges

In maritime business, these are other extra charges which are
incurred in providing or supporting a claim. They include survey
fees, sale charges, and expenses of inspection among others.
vii) Third party liability

This arises when the ship-owner has paid damages in respect of his
liability in tort to the owner of another ship or any property on it,
arising out of a collision between the insured ship and the other
vessel. Such liability is normally insured only to the extent of three
fourths. The balance of one –fourth remains the responsibility of
the ship-owner unless he insures it by entering his ship in a
Protection and Indemnity Association.
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Task 2: The significance of the documents used in marine hull and
machinery claims
Documentation forms a very important basis of hull and machinery

claims. Other than the issues of liability, documentation will determine
whether a claim will be honoured or repudiated by marine
underwriters. Moreover, proper documentation will determine claims
processing speed.
viii) Survey Report

This is either an inspection survey report or a damage survey
report. A damage survey is conducted to investigate instances of
damage and repair costs for vessels entered for Hull &
Machinery cover. The report will include a brief outline of the
circumstances and events relating to the casualty, together with
details and a description of the extent of the damage and an
estimate of repair costs.
ix) Copy of Protest

A letter of protest is a formal declaration whereby a person
expresses a personal objection or disapproval of an act. It may be
a written statement, made by a notary, at the request of a holder
of a bill or a note that describes the bill or note and declares that
on a certain day the instrument was presented for, and (e.g.)
refused, payment. In shipping there is a widespread practice of
using letters of protest to record discrepancies between ship and
shore figures, suspected presence of water content, damage to or
loss of cargo, etc. Protests are also made by the master against the
charterers of the ship or the consignees of the goods, for failing to
load or unload the vessel pursuant to contract, or within
reasonable or stipulated delays. On the other hand, the merchant
may make a protest (i.e. Letter of Protest) against the master, for
misconduct, drunkenness, etc., for not proceeding to sea with due
dispatch, for not signing bills of lading in the customary form,
and other irregularities.
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x) Copy of Custom Declaration Form/Entry Form
This is a document or a statement showing and describing the
goods being imported including the value on which relevant
government taxes by way of duty will be collected.
The document supports the commercial invoice value which is
issued separately.
xi) Log Books

The logbook is the formal document recording the progress and
management of a ship. A logbook is an official record book which
is used to keep information about a journey or voyage for ships.
Over time, logbooks have become more detailed, including
information about ports of call, crew complements, and events on
board ship. They are significant in claims because one can be able
to ascertain whether there was any casualty suffered by the vessel
on the way.
xii) Specifications and Tender

An estimate of the cost of repairs to the ship should be made and
discussed. If repairs are to be carried out immediately, the repairers
may be requested to submit a bid or discuss terms. Tenders should
be invited whenever possible. This may be requested by the Club.
Upon request, the surveyor may assist in writing the specification.
He will also give advice as to which repair yards should be
involved in the tender process. A specification should be structured
to cover:
- Agreed damage
- Any items subject to discussion
- General expenses
- Owner's work (if any)
The tenderers should be asked to quote distinct prices for the

specific items of work. It is also beneficial to reach an early
agreement as to whether dry docking is necessary. Before
commencing repairs, the owner's representative should seek the
Club's approval of his proposed course of action.
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During repairs, it is the owners representatives' duty to keep the
surveyor informed and to draw to his attention any major changes
in the scope of agreed work. The object is to ensure that all
necessary information is conveyed to the surveyor, in good time. In
the end, this will facilitate the further handling of the case. When
repairs are completed, an assessment meeting should be arranged,
to re-check work content and schedules and reach agreement on the
time invoiced for the different items. An essential part of any
survey report is a detailed presentation of all costs involved,
analysed item-by-item. If the surveyor is to supply this
information, very close cooperation is required with the owner's
representative. The best way to achieve this is to invite the
surveyor to participate in the discussions involved in the settlement
of repair invoices. This will enable him to finalise his report
expeditiously. It will also ensure rapid settlement.
The surveyor is required to certify that costs are fair and reasonable
and that they are related directly to the damage in question. If he
cannot certify this and cannot resolve outstanding issues with the
owner's representative, this fact should be stated clearly in his
report.
A full range of costs should be brought to the surveyor's attention

and submitted for approval, such as:
- Additional costs for working overtime

- Subcontractors
- Spare parts or other supplies
- Work carried out by the crew in relation to damage repairs
Should the owner choose to defer the repair of the damage (given
approval by the classification society), a specification of
outstanding repairs should be drawn up, agreed and form part of
the Surveyor’s report.
When an owner’s representative takes the Club's surveyor into his

confidence and maintains open communication throughout the
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case, there should be few if any problems in reaching a fair and
amicable settlement. Where there are opposing opinions every
effort will be made to resolve them. A full description of any
unresolved issues will be included in the report.
xiii) Copies of Third Party Recovery Correspondences

These will assist the marine insurance company to pursue
recovery from the responsible third parties by way of
subrogation.
xiv) Completed and Signed Claim Form

A claim is a formal request to an insurance company asking for a
payment based on the terms of the insurance policy. A completed
and signed form is one where all the necessary information on
the claim has been completed. It is an important document
because marine insurance claims are reviewed for their validity
before payment based on the claim form.
xv) Certificate of Inspection

There are two kinds of inspection of hull namely safety and
security inspections. Safety inspection is meant to ensure,
seaworthiness of vessel while main/auxiliary power inspection
ensures safe and operable machinery for vessel propulsion and
emergency power. Additionally, inspection of boiler and
electrical systems ensures satisfactory installation of wiring and
equipment. Once the above is done, a certificate of inspection is
issued.
xvi) Certificate of Registration

Ship registration is the process by which a ship is documented
and given nationality of the country that the ship has been
documented to. The nationality allows a ship to travel
internationally as it is proof of ownership of the vessel.
International law requires that every merchant ship be registered
in a country, called its flag state. Ship registration is similar to a
person receiving a passport. A ship is bound to the law of its flag
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state. It is usual to say that the ship sails under the flag of the
country of registration.
Vessel registration is required for all vessels wanting to travel

internationally and cross international borders. Registration is not
necessary for vessels that travel in local waters; however some
registries provide nationality to such vessels as well. Registration
provides the ability to determine which country's laws govern the
operation of a ship and the behavior of the crew.
xvii) Certificate copy of Note of Protest

During the course of a voyage if your vessel is or has
experienced bad weather or any nature of extraordinary events
and you fear that damage or loss may be caused to your vessel
and/or cargo you must prepare a Note Of Protest and upon
arrival and/or never after 24 hours having elapsed (not including
holidays, Saturdays and Sundays) have it notarized at Notary
Public.
’Notes of Protest’ should be made when and if you consider it
of utmost importance and necessity, not for the sake of doing so.
If for example there is a possibility of a claim from another
party to arise. If you suspect that damage has been caused to
the vessel only (i.e. through heavy weather, touching bottom,
striking locks etc.) there is no need for a ‘’Note of Protest’’ to
be issued same could be stated on a ‘’Statement of Facts’’.
When writing such a ‘’Note of Protest’’ bear in mind that you
must stick to the FACTS and only, keeping it as brief and as
clear as possible. Same can be extended upon a later date if
required. Also do not express any opinions whatsoever. Such
statement of opinions may and do often lead to unnecessary
complications and/or confusion in a later date. Furthermore due
to the fact that Notary Publics around the world use various
types/forms for ‘’Notes of Protest’’ it is quite difficult to
provided with any standard form, however there is a common
form which may be altered where necessary. Thus in the case
that ‘’Note of Protest’’ (or "Statement of Sea Protest) has been
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made and notarized by Notary Public the same should be
forwarded to the Marine Insurer.
xviii) Marine Casualty Form

This is a document that is completed to indicate the nature and
extent accidents involving the vessel in the sea. It will indicate
the damages caused as well as injuries.
Task 3: The procedure for processing marine hull and machinery

insurance claims
The procedure for handling hull and machinery claims will be

determined by the type of cover, the extent of loss and the nature of
loss. In general, however, the following detailed procedures apply.
i) Notification
This is the first step when intimating a claim. It can be done
through various means including: Telephone, Fax, e-mail, SMS,
Personal visit to Insurer’s office or insurer’s website. The claim
form contains the following details among others: Insured’s
details, details of subject matter, and estimated value of loss.
Notification enables the insurers take steps to investigate, assess or
adjust, minimize the insurer’s exposure/loss and enable them to
obtain information on possible recoveries.
ii) Claims review

This is where the insurer will compare the details in the claim with
those in the proposal form for the purposes of confirming, whether
the cover was valid at the material time, existence of insurable
interest, whether the sum insured was adequate and whether the
insured has complied with the policy conditions.
iii) Claims investigations

Claims handlers can adjust claims involving small amounts
internally. For big claims, insurers may appoint experts to deal
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with the case and give an opinion and these experts include marine
cargo surveyors and loss adjusters.
iv) Claims negotiation

This arises where there is dispute in the amount payable. Most
times the loss adjusters will negotiate on behalf of the insurers. At
times the negotiations may involve the insurance brokers and
agents.
v) Claims settlement
This is the final stage in the claims process, which involves the
cash payment. Prior to settlement, the issue of liability and
quantum must be addressed
Task 4: The role of hull and machinery surveyors and adjusters
Marine hull and machinery surveyors as well as adjusters play a

critical role in the management of hull risks. They are involved in
claims investigations and claims negotiations.
i) Claims investigations
Hull and machinery claims are investigated to establish the causes,
nature and extent of damage to the ship and machinery. This is
done by marine adjusters, marine general adjusters and surveyors.
ii) Claims negotiation

This arises where there is dispute in the amount payable on damage
to the ship and machinery. Most times the loss adjusters and
general adjusters will negotiate the claims quantum on behalf of
the insurers. At times the negotiations may involve the insurance
brokers and agents.
iii) Claim settlement

In order to ensure full claim benefits in their claim against H&M
Underwriters, Ship owners should inform their Underwriters
immediately a casualty occurs; to enable Underwriters to appoint a
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Marine Surveyor to survey and investigate the casualty under
claim at the earliest opportunity. Major Casualties such as
Collisions, Groundings, Fires, Machinery Damage, Flooding of
Compartments, Heavy Weather Damage and Sinking will be dealt
with; detailing the pertinent information a marine surveyor has to
obtain whilst onboard the casualty vessel, before surveying the
damage sustained and subsequently determining the cost of
reinstating the vessel to pre-casualty condition. A comprehensive
report submitted by the appointed Marine Surveyor has significant
effect on fair and satisfactory claim settlement.
The prime reason for insurance is that in instances of a loss, the

Assured needs to get his correct claim paid and move on quickly. Both
Insurers and the Assured places great emphasis on customer
satisfaction as well. As an expert in the handling of marine casualties,
the early intervention of an adjuster ensures that all heads of claim,
whether under policies or against third parties, are identified and
assessed. Guidance is given to ensure that claims are processed
quickly and efficiently, and a close working relationship is established
with the attending surveyor. Interim payment recommendations are
made to assist with the assured’s cash flow, backed up by claim
estimates that help assureds understand the eventual insurance
recovery and any possible exposure to uninsured risks – also assisting
insurers with their reserving strategy. Mixing a high level of expertise
with a non-adversarial approach, the adjuster helps to maintain and
strengthen the relationship between assured and insurer, during the
stressful period between a casualty and final settlement.”
26.3.09 LEGISLATIONS AFFECTING MARINE INSURANCE

IN KENYA

a) explain relevant legislation affecting marine insurance in Kenya
b) describe the role of Insurance Regulatory Authority in
regulating marine insurance business
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Task 1: Explaining relevant legislation affecting marine insurance
in Kenya
The practice of any business or commercial activity particular those of

an international nature is governed by legislation. The practice of
marine insurance being such a business is influenced by various
legislations including: The Insurance Act Cap 487, Marine Insurance
Act, Cap 390, The Merchant Shipping Act, Cap 389 among others.
i) The Marine Insurance Act, Cap 390

This is an Act of Parliament to make provision in relation to marine
insurance business. It states the rights and obligations of insurers and
insured's and sets out the principles for dealing with different types of
marine claims; insurance principles such as good faith, abandonment,
total, partial and constructive losses, subrogation and warranty. The
various institute clauses builds on the provisions in the Act rather than
providing full stand- alone covers. This is the most important piece of
legislation in the practice of marine insurance.
ii) The Insurance Act, Cap 487

An Act of Parliament to amend and consolidate the Law relating to
insurance, and to regulate the business of insurance and for connected
purposes.
This includes marine insurance in Kenya. The law has detailed
provisions on the way the business of insurance should be conducted in
Kenya. It aims at regulating the business of insurance and deals with
such matters as: functions and mandate of the Insurance Regulatory
Authority, registration of the members of the insurance industry among
others.
Some of the objects and function of IRA include: ensure the effective
administration, supervision, regulation and control of insurance and
reinsurance business in Kenya; formulate and enforce standards for the
conduct of insurance and reinsurance business in Kenya; license all
persons involved in or connected with insurance business, including
insurance and reinsurance companies, insurance and reinsurance
intermediaries, loss adjusters and assessors, risk surveyors and valuers;
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iii) Section 20 of the Insurance Act, Cap 487 provides as below:
place any Kenya business other than reinsurance business with an
insurer not registered under this Act without the prior approval,
whether individually or generally, in writing of the Commissioner.
place any reinsurance of Kenya business with an insurer not
registered under this Act except under the following conditions-
a) in the case of treaty reinsurance, with the approval of the
Commissioner to the treaty, and subject to such restrictions as
he may specify;
b) in the case of facultative reinsurance subject to the prior
approval in writing of the Commissioner to the placing of each
particular risk with insurers or reinsurers not registered under
this Act.
Section 2 of the Insurance Act Cap 487 define Kenya business as

follows:
“Kenya business” and “Kenya reinsurance business” means

insurance business carried on by an insurer in respect of any person,
human life, property or interest situated in Kenya, or in respect of
which premiums are ordinarily payable in Kenya and include insurance
business in respect of any vessel, hovercraft or aircraft registered or
ordinarily located in Kenya and includes marine cargo insurance
policies on all imports entering Kenya, including marine cargo
insurance policies for commercial imports, but excludes marine cargo
insurance policies issued on personal effects, goods and items
imported into Kenya by returning residents or passengers entering
Kenya for permanent or temporary residence.
The National Treasury in Kenya gave a directive to cargo importers

requiring that Kenyan underwriters’ insurers with effect from January
1, 2017, in effect enforcing/implementing Section 20 of the Insurance
Act Cap 478, insure all imports to Kenya.
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iv) Merchant Shipping Act, Cap 389
It is an Act of Parliament to make provision for the registration and
licensing of Kenyan ships, to regulate proprietary interests in ships, the
training and the terms of engagement of masters and seafarers and
matters ancillary thereto; to provide for the prevention of collisions,
the safety of navigation, the safety of cargoes, carriage of bulk and
dangerous cargoes, the prevention of pollution, maritime security, the
liability of ship-owners and others, inquiries and investigations into
marine casualties; to make provision for the control, regulation and
orderly development of merchant shipping and related services;
generally to consolidate the law relating to shipping and for connected
purposes.
Section 15. of the Merchant Shipping Act related to Requirement for

insurance cover provides as below:
1. Every Kenyan ship shall carry an insurance cover against risks of
loss or damage to third parties, and in particular—
a) in respect of the shipowners liabilities to a crew member under
any provision of Part VII; and
b) Claims in respect of loss or damage caused by any cargo
carried on board the ship.
2. Every foreign ship anchoring in or trading in or from Kenyan
waters or entering a port in Kenya shall carry insurance cover
against risks of loss or damage to third parties.
3. Where a ship is in contravention of this section, the owner shall be
deemed to have committed an offence and shall be liable, upon
conviction, to a fine not exceeding one million shillings, or to
imprisonment for a term not exceeding five years, or to both such
fine and imprisonment.
v) Income Tax Act, Cap 470

This is an Act of Parliament to make provision for the charge,
assessment and collection of income tax. It makes provision for the
ascertainment of the income to be charged; for the administrative and
general provisions relating thereto; and for matters incidental to and
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connected with the income tax. As incentive to individuals to purchase
life insurance, there are tax exemptions given by government.
Task 2: The role of Insurance Regulatory Authority
The body, which is charged with the responsibility of implementing

and overseeing the operation of The Insurance Act, 1984 Cap 487 of
the laws of Kenya is the Insurance Regulatory Authority. The
Insurance Regulatory Authority (IRA), is an autonomous government
institution which was created by the Insurance (Amendment) Act of
2006 and came into operation on 1st May 2007. It took over the
functions of the former department of insurance of the Ministry of
Finance. The Authority was established with the mandate of
regulating, supervising and developing the insurance industry in
Kenya. The regulation of marine insurance business is therefore part
of the role of the Insurance Regulatory Authority (IRA).
The key functions of the IRA are:
a) To ensure effective regulation, supervision, and development of
insurance in Kenya including marine insurance;
b) To formulate and enforce standards of conduct of insurance
business;
c) To issue licences to qualified persons to conduct insurance
business including marine insurance;
d) To protect the interests of insurance policyholders and insurance
beneficiaries;
e) To promote the development of the insurance sector in Kenya;
f) To ensure prompt settlement of claims by insurers;
g) To investigate and prosecute insurance fraud;
h) To improve efficiency in handling of complaints against members
of the insurance industry by the insuring public.
More specifically, the conduct of Marine insurance business in Kenya

is governed by Sections 2 and 20 of the Insurance Act Cap 487.
Section 2 defines ‘Kenyan business’ as: “…insurance business carried
on by an insurer in respect of any person, human life, property or
interest situated in Kenya, or in respect of which premiums are
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ordinarily payable in Kenya and include insurance business in respect
of any vessel, hovercraft or aircraft registered or ordinarily located in
Kenya and includes marine cargo insurance on all imports entering
Kenya, including marine cargo insurance policies for commercial
imports…”
Section 20 of the Insurance Act prohibits placing of Kenya business

other than reinsurance business with an insurer not registered under the
Act without prior approval by the Commissioner.Buyers are forbidden
to insure imports abroad or import on Cost, Insurance & Freight basis
(CIF).The Government of Kenya wishes imports into Kenya to be
transacted on a FOB basis while exports to be made on CIF basis. This
means that lots of insurance business will be created for the local
insurance industry.
Kenyan traders need to give support to local insurers as they have
capacity to absorb marine risks.
26.3.10 EMERGING ISSUES AND TRENDS

a) explain the emerging issues and trends
b) discuss the challenges posed by the emerging issues and trends
c) discuss ways of coping with challenges posed by the emerging
issues and trends
Task 1: Explaining the emerging issues and trends
There are structural changes in the mutual P&I Clubs. The marine
insurance industry as a service industry is subject to pressures
sometimes under estimated but they exist and they are increasing. The
impact of such changes specially the changes in the general insurance
industry that has influence on the mutual clubs in the marine insurance
industry. Recently, the mutual P&I clubs has witnessed the pressure of
a review by the European Commission of International Group
Agreement and competition from fixed premium providers. The
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mutual clubs are responding to these challenges by providing range of
services including one-stop- shop service through Joint ventures or
alliances with the corporate players. The development of information
technology, the commoditisation of insurance services and competition
by products on the basis of price rather than historical relationships are
undermining the insurance relationship, which continues to be at the
heart of the most marine mutual insurers. The above aspect raises the
question on the survival of concept of mutuality.
Another area where competition seems set to increase is electronic

payments processing and provision of insurance services over the
Internet. This is a global phenomenon that will certainly affect the
marine mutual industry. Non- financial firms which means the non-
marine insurance providers, who control communication networks and
the gateways could set themselves up as brokers directing customers to
the best product. The loyalty of the customer would increasingly be to
the broker rather than the producer of the product or the one who
actually provides the insurance service. What is the immediate impact
of such a development? At the very least this process will squeeze the
margins of traditional insurance providers. It is also highly likely that
there are non-financial firms offering such services who would be in a
position to design a new product by using the information available to
them through data mining technology. Whether such a product will
start competing with the traditional product offered by segmented
insurance service providers is important. Let us say a popular web
portal can offer an integrated service of P&I, Hull, Cargo and FD&D
cover from various insurers by combining the best, which meet the
specific needs of the shipowners and call it new product. In such a case
the brand value of the original segmented product, namely the insurer
of P&I or Hull or cargo loses its importance.
Given the new, emerging and increasingly complex risks faced by the
maritime industry, the insurance market must adapt to meet the
evolving needs. In fact, the marine insurance market continues to grow
and evolve to address maritime industries new operating and trading
environment. While bad weather and rough seas may have been the big
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risk of days gone by, today’s risk management challenges also include
constantly changing global economic conditions, and larger, more
technically-equipped vessels which pose a cyber threat and a larger
concentration of insured values. The maritime industry’s insurance
needs are changing, often quite rapidly, but so is the marine insurance
industry that’s intent on meeting them.
In 2016, there are over 100 marine insurance carriers in the global
insurance market with continued new entrants every year. Last year,
and continuing this year, the insurance industry has seen its share of
merger and acquisition activity. Most notably, global marine insurance
XL Group acquiring Catlin Group to become XL Catlin in May 2015
and more recently, in January 2016, ACE Group completed its
acquisition of Chubb and is now operating under the Chubb name. We
have also seen U.K.’s Amlin being acquired by Japanese Mitsui
Sumotomo and U.S. –based HCC’s acquisition by Tokio Marine
Holdings. M&A activity like this can increase a marine insurers’ scale
and their global reach. For maritime companies, that can translate into
access to more insurance capacity – higher limits from larger carriers –
as well as a connection to insurance coverage in more countries across
the globe. This activity in the current market is driven by insurers need
for scale and depth of product service, but to best serve their maritime
clients, they will also need to be efficient, nimble and not encumbered
by heavy infrastructure.
The growing number of marine insurance carriers, along with some

other factors, has created a very competitive marketplace that looks
like it will persist into 2016 and beyond. For maritime companies,
marine insurance rates – across all lines of cargo, hull & machinery,
and marine liability – have continued to show downward pressure.
While initially, there was market speculation that the explosion at
China’s port of Tianjin would result in increased rates, there is little
evidence we will see significant movement in today’s market.
While competitive rates can be good news for maritime companies, it

carries some risk of its own. With many new market entrants, there is
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the risk that they lack the longevity and track records to support their
maritime clients through “rougher seas” or at least a large loss event.
Few would argue that while the market has seen fewer losses,
especially those related to natural catastrophe events, the ones that do
occur – Tianjin, Costa Concordia, Deepwater Horizon – have been
larger and more complex than previously seen.
Both large and small maritime companies require specialized expertise

both in underwriting and claims. Unfortunately, the repercussion of
having so many marine insurance markets is that talent can be diluted.
Similar to the maritime industry’s talent shortage concerns, the marine
insurance market is having similar issues. Experienced marine
underwriters – with an intimate, thorough knowledge of the maritime
industry and the risks its up against – are in demand. With increasing
governance and the need for compliant programs, it is even more
important to partner with the right marine insurance carrier. So while
the maritime industry enjoys today’s insurance rates, they are wise to
carefully evaluate what they are receiving in return such as depth of
knowledge, and risk management expertise including loss prevention
and claims management. Experienced underwriters and claims
specialists can play a key role in helping firms effectively address both
traditional risks, and the risks that are more complex than ever before.
Consider these risks that many maritime companies must contend
with:
Higher Cargo Values: International trade volumes continue to climb.

With more cargo on larger vessels there is an increase in concentrated
values which presents the potential for a large catastrophic loss.
Arctic Trade Routes: Global Warming and sea ice melting have
opened the Arctic trade routes for longer periods of time. Shipping
companies are optimistic about the potential, in particular to save time
and money. To compound the situation, cruise ships are looking into
the possibility of adding Arctic trips to their portfolio of exotic cruises.
These new activities could be very problematic in the event of a
casualty as there is no current infrastructure and little services to
respond to emergencies.
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Cyber Threats: The majority of cyber-attacks are attempts to obtain
personal or financially sensitive data. Now, companies across all
business sectors – not just maritime companies – are bracing for what
they anticipate will be more sophisticated cyber-attacks. Attacks that
attempt to inflict damage to property and operations by seeking to take
command of industrial control systems such as vessel navigation and
propulsion systems, cargo handling and container tracking systems at
ports and on board ships. These are all controlled using software that is
fundamental to smooth running operations. Highly-skilled hackers
have demonstrated the ability to penetrate the systems used by the
maritime industry, with potentially disastrous consequences. Through
cybercrime it is possible to fraudulently assume ownership of goods
through the theft or alteration of shipping documents whilst they’re
being sent from one side of the world to the other. Brokers need to be
aware of the importance of letting their clients know that it is critical to
minimise the chances of their computer systems being compromised.
In marine, everything is being done online. And so there’s a risk in
people getting access to records, which for example could identify that
there are high valued goods in a container. If that information is
passed to someone that is a criminal, theft could occur.
MEGA-SHIPS AND CARGO ACCUMULATION-Cyber is not the

only emerging risk making waves in the marine industry. Many
underwriters are also keeping an eye on the rise of the mega-ships.
Capable of holding more than 20,000 containers, mega-ships can
transport cargo worth more than $2 billion. These mega-ships are state-
of-the-art, so there’s no inherent added risk to the container per se. But
the sheer accumulation of wealth is what has insurers taking note. With
a value of about $100,000 per container, we are talking significant
values at risk. Larger Vessels: Ships are getting bigger – much bigger.
SUPER-STORMS AND CLIMATE CHANGE-Another emerging risk
is the increasing frequency of super-storms due to climate change such
as Hurricane Sandy. Risk management or cyclone mitigation controls
allow us to work with the broker and the insured to move the at-risk
goods or containers out of the way.
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POLITICAL RISKS-Then there are emerging geopolitical risks.
Developing nations are becoming key parts of the overall global
supply chain so that in itself is an enhanced risk.
Task 2: Discussing the challenges posed by the emerging issues and

trends
Mega vessels require huge settlement of claims in case of loss of or

damage to the vessels.
With cyber threats and theft of valuable cargo it means the claims will
be increasing.
Climate change resulting in super storms thus affecting ships and cargo
in terms of damages.
Task 3: Discussing ways of coping with challenges posed by the
Task 3: Discuss ways of coping with challenges posed by the

Employ mechanism on limitation of liability.

Pooling of resources by marine insurers to contribute in cases of loss
or damage to cargo/ship.
Establishing a Fund on limitation of liability to cater for any loss or

damage to ships or third party liabilities
The mutual clubs need to provide range of services including one-stop-

shop service through Joint ventures or alliances with the corporate
players.
Enhance cyber security to address hacking of IT Sytems.
152
REFERENCES
1. Introduction to Insurance: Muriithi Kogi, Onuong’a Maragia,
College of Insurance Study Course Dip 101
2. Principles of Marine Insurance: Andrew Fisher, Paul A.C; C.I.I
Tuition Service Study Course 770
3. Marine Hull and Associated Liabilities: Paul A.C; Charlotte
Warr ; C.I.I Tuition Service Study Course P98
4. General Insurance Practice: Study Manual – College of
Insurance.
5. Marine Insurance: Insurance Institute of India, IC 67, Revised
edition 2011
6. Marine Underwriting: Insurance Institute of India, IC 65, First
Edition 1999.
7. Marine Insurance Course Book; Institute of Chartered
Shipbrokers, 2013
8. The Insurance Act 1984, Cap 487
9. The Marine Insurance Act, 1906
10. Merchant Shipping Act, Cap 389
11. Income Tax Act, Cap 470 Revised 2012
12. Marine Insurance Act, Cap 390
13. Emerging Trends in Marine Insurance- by Ravichandran. R.
14. Guide to Hull Claims
15. Sea Protests (hhtp://mariners.narod.ru/seaprotest.html)
16. Role of the Underwriter in Insurance-by Lionel Macedo
17. ABS-Guidance Notes on Risk Assessment Applications for the
Marine and Offshore Oil and Gas Industries.
18. Ministry of Transport , Infrastructure, Housing and Urban
Development, Office of the Principal Secretary, State
Department of Shipping and Maritime Affairs: Marine Cargo
Insurance, Taskforce Report, 2016
19. www.ira.go.ke
153

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REPUBLIC OF KENYA

TECHNICAL AND VOCATIONAL

Diploma in Maritime Transport Logistics

The Law of Carriage of Goods

First published in 2018

© Kenya Institute of Curriculum Development

All rights reserved. No part of this manual may be photocopied

The Law of Carriage of Goods by Sea

16.2.02 Breach And Remedies: Contracts Of Carriage Of Goods By

16.2.06 International Conventions Applicable to The Carriageof

List of Figures ...............................................................................................58

This trainee manual is designed for Diploma in Maritime Transport

Through the modular and competency-based approach that was

I would like to acknowledge the input of the staff of Technical and

Julius O. Jwan (PhD)

Development of the trainee manual for the above curriculum required

To these parties, the staff and management of Kenya Maritime Authority

It is only through effective development of the human resource capacity that

Maj. (Rtd.) George Nyamoko Okong’o

16.2.2 General Objectives

16.2.01 INTRODUCTION TO LAW OF CARRIAGE OF GOODS BY

16.2.01T Specific Objectives

Task1: Explaining the meaning of Law of Carriage of goods by sea;

Carriage of Goods by Sea

International conventions have been put in place to regulate the contract of

Meaning of law: Law consists of a series of rules regulating behaviour, and

Nature of law of carriage of goods by sea: The law of carriage of goods by

Task 2: Explaining the meaning of Contracts of carriage of goods by

Contracts of carriage of goods by sea are based on the same general

Nature of the contract of carriage of goods by sea: The fundamental

Task 3: Describing the historical development of law of carriage of

There are various international conventions related to the law of contract of

The United Nations Convention on International Multimodal Transport of

“The United Nations Convention on Contracts for the International Carriage

It is worth noting that the international conventions to be discussed later in

Task 4: Explaining the scope of the law of carriage of goods by sea

Article 10 of the Hague Rules stipulates that the provisions of the

Under all Conventions carriage must be international and must be linked to a

Under the Multimodal Convention, article 2 makes reference to the scope of

16.2.02 BREACH AND REMEDIES: CONTRACTS OF CARRIAGE

16.2.02T Specific Objectives

Task 1: Explaining the meaning of breach of contract of carriage of

Nature and effect of Breach

There is no breach of the term if a ship deviates on reasonable grounds as,

Delay amounts to a deviation when it is such as to substitute an entirely

Breach of Intermediate terms:

Task 2: Explaining the Forms of breach of Contract in the carriage of

A material / actual breach is when there is a failure to perform a part of a

An anticipatory breach of a contract is when the non-breaching party

Breach of contract of carriage of goods by sea may include the following

Task 4: Explaining the Action for damages in the carriage of goods by

It is worth noting that in assessment of damages, the general rule is that

Task 5: Describing the remedies other than damages in the carriage of

i) Specific performance: Decrees of specific performance are rarely

16.2.03 DISPUTE SETTLEMENT UNDER THE LAW OF

16.2.03T Specific Objectives

Task 1: Explaining the Concept of disputes

A dispute is a disagreement over the existence of a legal duty or right or over

Task 2: Describing the jurisdiction of the courts

Task 3: Explaining choice of forum in relation to dispute settlement