Marine Insurance

Marine insurance enabled the expansion of trade by sea for all of the last millennium; sharing the risks of sea voyages has made our world as connected as it is today.

The principal definition of marine insurance is given in the UK’s Marine Insurance Act of 1906 which can be paraphrased as: Marine insurance is where an insurer contracts to compensate the counterparty for types of marine losses and damages as included in the contracts terms. ‘Indemnify’ is the exact word used, which means to secure one’s potential loss.

Contracts for marine insurance were first drawn up by Lombard merchants of Northern Italy in the 1100s, the financial innovation then spread to the Hanseatic league and secured the trade in wool, before reaching England in the 1300s. Marine insurance was central to a shift where more of the continent’s trade began to be carried over sea than over land.

Through the late 17th century, Edward Lloyd’s coffee house in London became the major meeting place for shipowners and insurance brokers. Contracts were agreed and carried out in and amongst the tables, before the Royal Exchange was founded in 1720. London therefore became the dominant global marine insurance market. In the Lloyd's market, a ‘slip’ of paper is drawn up by the insurance broker, which is then given to the insurer’s underwriters who choose how much of a ship or journey they will indemnify. The financial power and innovation of the London Lloyds insurance market was a central factor in Britain’s success in naval and trade wars over the later centuries.

The law surrounding marine insurance was first supported by merchants’ internal codes (lex mercatoria) before being codified in early European ordinances. In England, marine insurance was developed in common law by Lord Mansfield, but it was later brought into statute in the Marine Insurance Act of 1906. Canada and the USA followed the British law to create a ius commune (common law) across the western world.

Marine insurance can cover the ship itself as “hull insurance”, and cargo (all goods carried) and freight (‘profit earned from the employment of the ship’) are also usually insured on the same slip. Insurance can either be a ‘time policy’, for a certain time period, or a ‘voyage policy’, for a given journey. Whilst value policies are for the value of all goods carried by a ship, unvalued policies cover a specific amount of money. Indemnity or third party insurance can also be included, where the insurance covers the potential damage or loss of other’s property as caused by the owner’s ship.

For insurance to be valid, the owner party must have a clear commercial interest in the voyage succeeding as planned, and both parties must act in the utmost good faith during the contract and after its completion.