Marine Insurance

Calculation of Indemnity in Marine Insurance

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With the global economy increasingly dependent on international trade, marine cargo insurance has become an essential tool for businesses and individuals involved in the shipping industry.

A marine cargo policy is a type of property coverage for cargo vessels that protects the cargo owner from loss of their property when it is in transit. Like every other insurance, marine insurance is based on some core principles.

One such principle in marine cargo insurance is indemnity. Read this blog until the end to learn more about this principle and calculate the measure of indemnity in marine insurance.

What is the Principle of Indemnity in Marine Insurance?

The Principle of Indemnity is one fundamental principle of marine insurance, which ensures that the compensation paid to the insured is equivalent to the actual financial loss suffered without providing a means for profit. This principle is crucial in maintaining the integrity and fairness of insurance contracts.

The application of indemnity ensures that when insured goods are damaged or lost at sea, they are compensated for the actual value of the goods at the time of the loss, not their potential market value.

It is essential to grasp that under a marine insurance policy, the insured will only receive compensation based on the actual loss incurred. Therefore, when buying marine insurance online, you should be aware that it is purely for protection against losses, not for generating profit.

Methods to Calculate the Measure of Indemnity in Marine Insurance

In marine insurance, the indemnity calculation, which refers to the compensation paid to the insured, is determined by various methods that are carefully designed to suit specific types of coverage and scenarios.

The methods used for the measure of indemnity in marine insurance can be broadly categorised into the following:

General Average

The principle of General Average, as per maritime law, mandates that all participants in a maritime journey proportionately share any losses resulting from the intentional sacrifice of part of the ship’s cargo to safeguard the entire vessel during an emergency.

In this scenario, all stakeholders involved in the voyage contribute proportionately to offset the losses incurred for the collective benefit.

The core tenet of the General Average dictates that a party incurring significant expenses or losses to preserve property belonging to others is entitled to compensation for their loss from all parties involved in the voyage who have benefited from this action.

Salvage

Salvage methods are used in marine insurance for indemnity calculation when third parties assist in saving a ship or its cargo. When a vessel or its cargo is in peril, and a third party provides assistance, they may be entitled to a salvage award.

This award is a compensation paid to the salvor for their efforts in saving the property. The amount of the salvage award is not based on any agreement or contract but is given as a way to encourage people to help save lives and property.

Particular Average

In marine insurance, particular average (PA) refers to partial losses that are not classified as total losses. These losses are confined to a particular part of the ship or cargo, and the insurer is responsible for compensating the insured for the actual loss suffered. The indemnity calculation for PA is calculated using various methods, which are determined by the terms of the policy.

Actual Total Loss (ATL)

In the event of an Actual Total Loss (ATL), the insured item is deemed to be entirely destroyed or lost beyond any possibility of recovery. In such instances, the insured party becomes eligible to receive the total insured amount, free from any deductions.

This means that the insured receives the complete amount outlined in the insurance policy, without any reduction, to compensate for the total loss suffered. The loss is definitive and unambiguous, leaving no room for ambiguity regarding the extent of the damage or loss.

Constructive Total Loss (CTL)

Constructive Total Loss (CTL) refers to a situation in marine insurance where the insured item is not entirely lost. Still, the cost of repairing the damage is so high that it exceeds a specific percentage (commonly 75% or 80%) of the insured value.

In such cases, the insured has the option to either declare a total loss or seek reimbursement for the repair costs. When a CTL occurs, the insured party can choose to claim a total loss, which means they will receive the full sum insured, as per the policy terms, without any deductions.

Marine Insurance

Alternatively, the insured can opt for reimbursement for the repair costs, which will be subject to the policy’s terms and conditions. The principle behind CTL is to ensure that the insured is compensated for the actual loss suffered without providing a means for profit, aligning with the core tenet of indemnity in insurance.

 Conclusion

The measure of indemnity in marine insurance is an essential part of the maritime industry’s protection. It ensures fairness and transparency when insured parties are compensated for losses.

Marine insurance is crucial for international trade and helps maintain economic stability. Standard calculations and clear agreements make this measure reliable and adaptable, allowing commerce to continue smoothly worldwide.

Therefore, it is important to buy marine cargo insurance from reputable insurers like Tata AIG to ensure you are adequately reimbursed in the event of damage or loss.

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