Abstract
In all the above chapters we have discussed either how the absence of insurance influenced the design of certain aspects of maritime liability law or what should be the ideal liability laws in the presence of widespread modern insurance. A frequently asked question in the discussion of liability law and liability insurance is how to maintain incentives towards care in the mind of potentially liable parties after they purchase liability insurance. Apparently, when potentially liable parties do not have to pay directly from their own pockets due to the fact that they have insurance, they will have less motivation to exercise proper care. This phenomenon is known in the insurance literature as ‘moral hazard’ i.e., the tendency of an insured to relax precaution levels against the potential loss or liability. The main question examined here is whether liability insurance really distorts the incentive effect of liability law or whether the presence of liability insurance creates even better incentives.
An earlier version of the chapter is published in Billah (2008), pp. 427–461.
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Notes
- 1.
- 2.
Prof. F. James posed the same questions in 65 years ago in James (1948), p. 557. Although my answer to the questions is similar to his, his answer was mainly based on some empirical evidence to the effect that accident rate dropped in some areas where liability insurance is available. See James (1948), pp. 557–563. We, on the other hand, undertook a comparative analysis on the informational strength of courts and liability insurers and on the financial incentives of liability law and insurance mechanisms to induce potentially liable insured to take precautions. We also used some empirical evidence.
- 3.
The insurance mechanisms include rate variance, deductibles, policy limit, policy exceptions, etc., while the law prevents moral hazard through the duty of disclosure in the pre-formation stage of an insurance contract, insurance warranties and the principles of insurable interest and of indemnity, among others.
- 4.
A defendant’s liability usually equals to the loss suffered by the plaintiff. We will, therefore, use the words “loss” and “liability” interchangeably in this chapter unless expressly stated otherwise.
- 5.
In the presence of widespread liability insurance and accident insurance, the main justification of liability law is its deterrent effect on negligent conducts and not the compensation of victims. See Shavell (2004), pp. 267–269.
- 6.
Like any form of insurance, marine insurance is a means to manage risk through distribution of risk over a large number insured parties (‘interpersonal spreading’) and/or through shifting the individual insured’s future risk to the insurer in exchange of premium (‘inter-temporal spreading’). See Calabresi (1970), pp. 42–43. As discussed in Chap. 2, insurance is just one means to manage risk. Other risk management strategies include personal saving, diversification, contract for future goods and services, and safety precautions. Abraham (1986), pp. 2 and 67. Risk management through marine insurance involves the protection against the loss of a ship (hull insurance), its potential earning capacity (freight insurance), its onboard cargo (cargo or liability insurance, depending on which side bears the burden of cargo loss) and the protection against liability arising from the operation of a ship (liability insurance). Marine insurance can be further divided on the basis of duration of coverage into time and voyage policies and on the basis of the amount of coverage into valued and unvalued policies.
- 7.
See Coase (1960), pp. 1–23. Optimal care also demands the reduction of an activity level when the benefit from an additional level becomes less than its social cost due to ‘diminishing marginal utility.’ Courts, however, rarely count activity level in determining due care. We will, therefore, limit the scope of care to the way an activity is conducted and not to its level. See Shavell (2004), pp. 193–198.
- 8.
For simplicity of the analysis, we assume here that care by any side would eliminate or reduce a loss. There are situations where optimal care would require both parties to take some precautionary measures at the same time. For discussion on unilateral and bilateral care situations, see Shavell (1987), pp. 9–18.
- 9.
Coase (1960), pp. 1–23.
- 10.
Such costs include time and efforts and would likely to outweigh the possible benefits. See Shavell (2004), pp. 87–89.
- 11.
Both the ‘hold-out’ (i.e., asking more than the reasonable price) and ‘free-loaders’ (offering less than the reasonable price) problems arise in a ‘bilateral monopoly’ situation i.e., when the parties (e.g., polluters and the victims of pollution) have no other option but to negotiate with only each other in order to arrive at their desired agreement. See Calabresi and Melamed (1972), p. 1106; Shavell (2004), pp. 91–92.
- 12.
That is, benefiting from the negotiation of others without personally participating and incurring the cost. This mainly occurs when the number of plaintiffs/defendants is large and the individual benefit from such negotiation is small. Shavell (2004), p. 88.
- 13.
Lack of due care or negligence (a tort) can occur in many contractual situations such as a contract of employment, contracts to buy foods or to receive medical treatment etc. See Posner (2003), pp. 171–172.
- 14.
- 15.
Shavell (2004), pp. 177–178.
- 16.
In U. S. v. Carroll Towing Co. 159 F.2d 169 at 173 (2d Cir. 1947), Judge Learned Hand held that not taking care amounts to negligence when B < PL where B is the cost of precaution, P the probability and L the magnitude of a loss. In economic analysis of law, this is known as ‘Hand Formula.’ See Posner (2003), p. 168.
- 17.
Although courts do not calculate the cost of optimal care and the expected liability in mathematical terms, courts’ rulings on negligence in most of the time will roughly approximate such calculation. Courts’ determination of ‘reasonable care’ in negligence settings will vary with the cost of care and the risk of harm arising from the lack of care. The greater the harm or the more likelihood for it to occur, the higher would be the standard of ‘reasonable care.’ For example, in a narrow channel where the probability of an accident is higher, the standard of reasonable care would be correspondingly higher. Care in such situation includes lowering the speed (slow navigation means more time, which translates into more cost for a ship owner), and employing local pilots (thus incurring the pilotage fees). See The Alletta, [1965] 2 Lloyd’s Rep. 479 (where the master’s failure to use the service of a pilot caused an accident. The master was held negligent even though pilotage was not compulsory). See Posner (2003), pp. 169–170.
- 18.
See Calabresi and Hirschoff (1972), p. 1058.
- 19.
This is subject to the assumption that courts or jurors are not making error in holding a party liable despite the exercise of reasonable care by him.
- 20.
Such reasons include also (a) the errors by courts in not holding negligent parties liable, (b) high costs of litigation dissuading victims from pursuing litigation and (c) inability of negligent parties to pay the liability judgment (or their ability to shield assets from liability). Each possibility of escape makes the expected liability less than the actual loss arising from negligence and the lower expected liability may not induce potentially liable parties to expend on optimal care. See Shavell (2004), pp. 217–218, 224–232, 275, 387–401; Shavell (1987), pp. 167–169.
- 21.
- 22.
Courts may sometimes overestimate the loss and set the due care level above optimal care. Setting due care level above the optimal care may lead to excessive care. Although excessive care is a social waste, courts’ overestimation of possible loss will be very rare if we consider the total loss from negligence.
- 23.
For the convenience of analysis, we limited the expected loss from negligent conduct to the pecuniary and direct loss suffered by victims. For a thorough analysis, the expected loss needs to include non-pecuniary loss as well as the administrative costs of the liability system which would not have been incurred but for the negligent conduct. See Shavell (2004), pp. 269–275, 284–285.
- 24.
A negligent conduct with long term liability implication (e.g., negligent handling of toxic substances) brings uncertainty for insurers in the actual liability payment over the years. Insurers sometimes overcome such uncertainty by using ‘claim-made policy’ instead of ‘occurrence policy’. In a ‘claim-made policy’, insurers are liable only for claims filed during policy year as opposed to claims made after the policy year for negligent conduct occurred in the policy year. However, in a claim-made policy the insurer lacks motivation to try to determine the total expected liability from the negligent conduct and to devise optimal precautionary steps against such liability. See Abraham (1986), pp. 49–51.
- 25.
When a loss is not reasonably foreseeable, its probability may be too low to justify the cost of care which includes, among others, the cost of information about the risk. See Posner (2003), pp. 186–187. Even if the prevention or the reduction of such loss is cost-justified, not imposing liability for such loss may not have any detrimental effect on incentives because a potentially liable person would likely to overlook the possibility of such unforeseeable loss. Shavell (2004), pp. 238–239.
- 26.
See supra note 20.
- 27.
Shavell (2004), p. 244. Although a negligent party’s liability beyond the actual loss of the plaintiff in the case at issue will exceed the plaintiff’s full compensation, the additional liability may be imposed through fines which would go to the state and not to the plaintiff. Shavell (2004), pp. 272–275.
- 28.
In the case of uncertainty about the due care level or liability, a party may take more care than what is efficient in light of the expected liability. However, an insured party may not do so due to the moral hazard problem. Yet, the insurer may induce the insured to take such care. See generally Shavell (2004), pp. 224–227.
- 29.
These two facts explain why a potentially liable person would buy liability insurance even when the party takes every possible care or when no care is economically cost-efficient. See Posner (2003), p. 171.
- 30.
See Shavell (2004), pp. 228–229.
- 31.
As most insurance disputes in fact arise between insurers (e.g., a liability insurer defending a liability claim against its insured ship owner) and/or insurance-like entities such as the International Oil Pollution Compensation (IOPC) Fund trying to recoup the compensation they paid to the victims of oil pollution, courts incidentally benefit from the expertise and experience of these insurers and insurance-like entities. It is true that the presence and assistance of these experts will reduce the courts’ informational disadvantage as compared to that of insurers, thus helping the courts to determine the expected loss and the optimal care level more accurately. In addition, judges dealing with marine insurance matters are likely to be experienced in maritime matters. Still the insurer of a particular ship is likely to know better about various aspects of the insured ship than the experts (who may also be insurers but not the insurers of the same ship under the proceedings) and the judges (who may be very knowledgeable about marine insurance matters but unlikely to be more aware about the ship’s special features).
- 32.
To be exact, this would be the case when proper precaution will completely eliminate the loss. If it only reduces the magnitude or the probability of the loss, then cost would be optimal if it is less than the difference between the expected losses before and after care.
- 33.
See the ‘Hand Formula’ in supra note 16. Posner (2003), p. 168.
- 34.
See s 21(1) of the Canadian Marine Insurance Act, S.C.1993, c22 [hereinafter CMIA]; s. 18(1) of the British Marine Insurance Act, 6 Edward VII, ch. 41 [hereinafter MIA]. See also the House of Lords’ decision on the meaning of ‘material fact’ and ‘inducement’ in Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co, [1994] 3 All E.R. 581 (H.L.), where the court applied objective test to determine ‘materiality’ but subjective test to decide ‘inducement.’ This case partially overruled the British Court of Appeal’s decision in Container Transport International Inc. v. Oceanus Mutual Underwriting Association, [1984] 1 Ll. L.R. 476 (CA), where objective test was applied to both ‘materiality’ and ‘inducement’. In Canada, the Ontario case of Nuvo Electronics Inc. v. London Assurance (2000), 49 O.R. (3d) 374, 19 C.C.L.I. (3d) 195 (S.C.J.) discussed the above HL’s decision but did not follow HL’s definition of ‘materiality’.
- 35.
Henwood v. Prudential Insurance Company of America, [1967] S.C.R. 720 (SCC) (In this case the insured died in an automobile accident and the policy was avoided because of the insured’s failure to disclose the fact that he was suffering from clinical depression).
- 36.
S. 20 of CMIA and s. 17 of MIA. See Carter v. Boehm, (1766) 3Burr 1905 at 1909, where Lord Mansfield stated, “Good faith forbids either party, by concealing what he privately knows, to draw the other party into the bargain owing to his ignorance of that fact, and believing the contrary.” As for the connection between the duty of disclosure (s. 21(1) of CMIA, s. 18(1) of MIA) and the doctrine of utmost good faith (s.20 of CMIA, s.17 of MIA), see Bennett (2006), pp. 102–103, 158. See also Coronation Insurance Co. v. Taku Air Transport Ltd., [1991] 3 S.C.R. 622, [1992] 1 W.W.R. 217 at 228 (SCC). The doctrine of utmost good faith is, of course, much broader and may apply to all stages of an insurance contract than the duty of disclosure which is relevant mainly at the pre-formation stage of a contract. However, since the sole statutory remedy for the breach of good faith is the avoidance of the insurance contract and since this may cause severe hardship for the insured, especially when the breach is discovered only after the occurrence of an insured peril, courts tend to limit the application of the doctrine only to contract pre-formation stage. Bennett (2006), pp. 175–180.
- 37.
Per Lord Mansfield in Carter v. Boehm, (1766) 3Burr 1905 at 1909, “Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risqué, as if it did not exist.” See also Bennett (2006), pp. 100–108.
- 38.
For example, suppose the expected loss before any care is $2,000 and 1,000 of it cannot be eliminated by optimal care either because it is purely accidental or because taking care is not cost-efficient. If the other $1,000 can be eliminated by taking care at $500, setting premium at $2,000 for an insured who does not spend $500 on care to reflect his or her expected loss and reducing premium to $1,000 for another insured who spends $500 on care to reflect the latter’s expected loss would lead the former to take care at a cost of $500.
- 39.
Abraham (1986), p. 15. For instance, if insurance premium in the above note is set at $1,200 regardless of care, the first insured would not invest $500 in care and the second insured would pay $1,200 on premium instead of $1,000 and would spend nothing on care.
- 40.
That is, premium in the above example is set at more than $2,000.
- 41.
The very purpose of insurance is to reduce the problem of risk aversion so that risk-averse people do not take excessive precaution (i.e., over-invest in risk-prevention). If insurance itself is the source risk aversion, it fails in its purpose.
- 42.
See generally Abraham (1986), pp. 67–69.
- 43.
See s. 21(5) (b) and (6) (c) of the CMIA; Canadian Indemnity Co. v. Canadian Johns-Mansville Co., [1990] 2 S.C.R. 549, 72 D.L.R. (4th) 478; Coronation Insurance Co. v. Taku Air Transport Ltd, [1991] 3 S.C.R. 622, [1992] 1 W.W.R. 217.
- 44.
Neepawa Yacht Ltd. v. Laurentian P & C Insurance Co. (1994), D.R.S. 95-04330 (B.C.S.C.); Laurentian Pacific Insurance Co. v. Halama (1991), 7 C.C.L.I. (2d) 84, 60 B.C.L.R. (2d) 190 (B.C.S.C.).
- 45.
Nova Scotia Marine Insurance Co. v. Stevenson (1894), 23 S.C.R. 137, rev’g. (1889), 25 N.S.R. 210 (C.A.).
- 46.
cf. Seaman v. West (1885), Cout. S.C. 723, Cass. S.C. 388 (S.C.C.) aff’g (1884), 17 N.S.R. 207 (C.A.).
- 47.
Fudge v. Charter Marine Insurance Co (1992), 8 C.C.L.I. (2d) 252, 97 Nfld. & P.E.I.R. 91 (Nfld. S.C.T.D.).
- 48.
Atlantic Freighting Co. v. Provincial Insurance Co. Ltd. (1956), 5 D.L.R. (2d) 164 (N.S.S.C.).
- 49.
The use of the word ‘warranty’ or its absence is not the decisive factor whether a requirement is warranty or not. It all depends on the intention of the parties as evidenced from the words they used in the policy. See Gilmore and Black (1975), pp. 67–68. See also s. 33 (1) of the CMIA.
- 50.
See the ‘basis clause’ in rule 6(2) of the Britannia P&I rules; cited in Bennett (2006), p. 181.
- 51.
S. 32 (1)(a) and (b) of the CMIA. For example, in Shearwater Marine Ltd. v. Guardian Insurance Co of Canada (1998), 60 B.C.L.R. (3d) 37 (C.A.), aff’g. (1997), 29 B.C.L.R. (3d) 13 (S.C.), the insurance contract contained a warranty in the following words, “Warranted … Vessel inspected daily basis and pumped as necessary.” See DeGroot v. J.T. O’Bryan & Co (1979), 15 B.C.L.R. 271 at 281 (C.A.) as to the need of (promissory) warranty for certainty of future facts/obligations. See also Strathy and Moore (2003), pp. 43, 72–73.
- 52.
See Elkhorn Development Ltd. v. Sovereign General Insurance Co. (2001), 87 B.C.L.R. (3d) 290, 26 C.C.L.I. (3d) 23 (C.A.), rev’g (2000), 18 C.C.L.I. (3d) 203, (B.C.S.C.).
- 53.
S. 39 (1) and (2) of the CMIA. See also Beacon Life & Fire Assurance Co. v. Gibb (1862), 1 Moo. P.C.N.S. 73 (P.C.). Because of this harsh consequence, the courts in Canada are very reluctant to find the breach of warranty unless both its wording and its breach are clear and unambiguous. See Strathy and Moore (2003), pp. 132, 143–144. Courts have made distinction between ‘warranty’ and ‘suspensive condition’ or ‘warranty delimiting the risk’, the breach of the latter only suspends the coverage. Loss not causally connected to the breach of warranty is recoverable from the insurer. See Century Insurance Co. of Canada v. Case Existological Laboratories Ltd, [1983] 2 S.C.R. 47, 150 D.L.R. (3d), 2 C.C.L.I. 172, aff’g. (1982), 35 B.C.L.R. 364, 133 D.L.R. (3d) 727 (C.A.), rev’g. (1980), 116 D.L.R. (3d) 199 (B.C.S.C.); Tulloch v. Canada (Department of Fisheries and Oceans) (1988), 21 F.T.R. 72, 32 C.C.L.I. 36, aff’d. (1989), 96 N.R. 51, 37 C.C.L.I. 229 (F.C.A.); Landmark Corp. v. Northumberland General Insurance Co. (1984), 8 C.C.L.I. 118 (Ont. H.C.J.); Federal Business Development Bank v. Commonwealth Insurance Co. (1983), 2 C.C.L.I. 200 (B.C.S.C.). However, in order to avoid the uncertainty of courts’ interpretation, some insurers not only describe a term as warranty but also mention the forfeiture of the policy as the consequence of its breach. See clause 1 of British Columbia Builders’ Risks Clauses (1/1/89); cited in Strathy and Moore (2003), p. 137 note 4.
- 54.
Shavell (2004), pp. 257, 265–266.
- 55.
While incentives through rate variance based on the actual care (feature rating) depend on the insurer’s ability to observe the various aspects of care taken by the insured, such ability is not necessary to induce care in the case of rate variance on the basis loss history (experience rating). Experience rating, however, takes place after the occurrence of losses and may sometimes take years to reflect on the actual premium especially in maritime insurance. In other words, the shortcomings of one factor may be compensated for by the advantages of the other. See generally Abraham (1986), pp. 71–73. See also Shavell (2004), pp. 262–263 and note 7, 277–278.
- 56.
See generally OECD (2004).
- 57.
As Prof. Atiyah puts it, “Although the tortfeasor will not personally have to pay any damages awarded against him, his insurer will have to do so; and the insurer may visit his displeasure on the insured by increasing his insurance premiums.” Atiyah (1975), p. 1 (emphasis added).
- 58.
See the example supra note 38.
- 59.
See Gold (1991), p. 429: “Although it is sometimes suggested that this fairly extensive [marine] insurance coverage might contribute to a careless operational attitude, this is an erroneous view. Insurance rates are not calculated only on actuarial projections, but are also related to the loss record of a particular owner and/or vessel. Accordingly, even if the accident is fully covered by liability insurance today, the ship owner will be paying increased premiums tomorrow.”
- 60.
LEG/CONF.2/C.1/WP. 3 (30 Nov. 1971) in IMCO (1978), p. 242.
- 61.
Over 90 % of the world ocean-going tonnage is insured by the International Group of P&I clubs. Bennett (2006), p. 486; Tilley (1986), p. 261. See also the Group’s website at http://www.igpandi.org/. Accessed 03 September 2013.
- 62.
Historically, vessels were classed with different gradations based on an assessment of various factors mainly bearing on the vessels’ seaworthiness. Today classification societies do not use such gradation. A vessel today is either ‘in class’ or not. Yet, the initial and the periodic survey reports provide valuable information to the vessels’ insurers. See Daniel (2007), p. 189.
- 63.
Martin (2003), pp. 48–49.
- 64.
- 65.
These clauses in insurance policies show the faith and reliance marine insurers have on the risk assessment by classification societies.
- 66.
See Laurentian Pacific Insurance Co. v. Halama (1991), 7 C.C.L.I. (2d) 84, 60 B.C.L.R. (2d) 190 (S.C.); see also Hazelwood (2000), pp. 115–116.
- 67.
See New Hampshire Insurance Co v Oil Refineries Ltd, [2002] 2 Lloyd’s Rep 462; [2003] Lloyd’s Rep IR 386 (C.A.).
- 68.
See for example Rule 23B(i) of the Steamship Mutual; cited in Martin (2003), p. 50.
- 69.
See Shavell (2004), pp. 98–99 and 189.
- 70.
This would only occur in bilateral care situations i.e., where both the injurer and the victim can take care at the same time. See Shavell (2004), pp. 184–188.
- 71.
See Shavell (2004), pp. 259–261.
- 72.
See International Hull Clauses (01/11/03), clause 15; Institute Time Clauses Hulls (1/10/83 and 1/11/95), cl 12; Hazelwood (2000), pp. 259–260. Statistics on 119 major cargo claims paid by Gard, a Norwegian P&I club, show that there was about US$3.4 million in deductibles out of total US$60 million payout. The study period was 5 years from 1996 to 2000. See Gard (2005), p. 4.
- 73.
However, if the cost of optimal care is below the expected deductible i.e., $50 in our example, deductible would lead to optimal care. In other words, if $50 is what it takes to completely eliminate the risk or reduce it to an economically efficient level, then deductible will induce optimal care. See generally Shavell (1987), pp. 194–196.
- 74.
Per Justice Cory in Coronation Insurance Co. v. Taku Air Transport Ltd, [1991] 3 S.C.R. 622, [1992] 1 W.W.R. 217 at 229, “When Lord Mansfield set the principle governing insurance contracts the world was a little different. It was a simpler if not, in some respects, a gentler place. The business of insurance was very different. The policies of insurance were issued most frequently to cover a vessel or its cargo. The contract was issued for the benefit of the insured.” [Emphasis added].
- 75.
Reynardson (1969), p. 467.
- 76.
This is actually three fourth of the proportionate liability of the insured value of the vessel. So, if the actual collision liability is more than the insured value of the vessel, the three-fourths of the actual liability would also exceed the coverage. However, insured can buy supplementary cover for this excess liability under Institute Time Clauses-Hulls Excess Liabilities (1/11/95). See Bennett (2006), pp. 400–401 note 48.
- 77.
See clause 6.1 of the International Hull Clauses (01/11/03).
- 78.
See the Pooling Agreement of International Group of P&I Clubs; available at http://www.igpandi.org/Group+Agreements/The+Pooling+Agreement. Accessed 01 September 2013.
- 79.
The insured may spend more on care than what would be his expected personal liability due to deductible and/or liability ceiling. This would not amount to excessive care as long as the cost of care does not exceed the total expected loss/liability.
- 80.
For the definition and effect of ‘risk-aversion’ see infra Sect. 7.3.4.1.
- 81.
See Gilmore and Black (1975), p. 82.
- 82.
See Bennett (2006), pp. 744–745. Although deductibles also have similar advantage in reducing the administrative cost for small claims, it cannot be said that the saving of administrative cost is its main function. If this were so, there would be no justification to deny paying the deductibles when the loss or liability exceeds the amount of deductible.
- 83.
See Institute Time Clauses Freight (1/8/89 and 1/11/95), cl 12; Institute Voyage Clauses Freight (1/8/89 and 1/11/95), cl 10. See also Strathy and Moore (2003), p. 172.
- 84.
The word ‘warranty’ here means ‘exclusion’. For examples and discussion on particular average warranty, see Gilmore and Black (1975), pp. 79–82.
- 85.
For example, see clause 6.1 of the International Hull Clauses (01/11/03), providing three-fourths coverage for collision liability without any prohibition on coverage for the remaining one-fourth. In fact, optional clause 38 of the International Hull Clauses or P&I clubs offer coverage for this one-fourth. See Bennett (2006), pp. 398–399.
- 86.
Buying coverage from a second insurer only for the uncovered portion may not be available at all. Even if it is available, the premium may be very high compared to the coverage because the premium would include the administrative costs and profits for the second insurer.
- 87.
See generally Bennett (2006), pp. 545–548.
- 88.
See s. 39 (2) of the CMIA.
- 89.
See Muirhead v. Forth & North Sea Steamboat Mutual Insurance Association, [1894] AC 72; cited Bennett (2006), pp. 545. A similar purpose could be achieved also through “no other insurance” warranty; see Butler v. Merchants Marine Insurance Co. (1885), Cass. Dig. 390 (SCC).
- 90.
Even when the hull insurance provides for a three-fourth collision liability, the insurer may cover the remaining one-fourths of such liability for additional premium. For any shortfall either in the form of remaining one-fourth or excess liability, coverage is invariably provided by the P&I clubs. Bennett (2006), pp. 400–401. As for other kinds of liability insurance, coverage is practically unlimited.
- 91.
See Institute Time Clauses Hulls (1/10/83), cl 21.2; (1/11/95), cl 22.2; International Hull Clauses (01/11/03), cl 24.2; Institute Voyage Clauses Hull (1/11/95), cl. 20.2; cited in Rose (2004), p. 598 note 139.
- 92.
S. 53(2) of the CMIA; s. 55 (2) of the MIA.
- 93.
Lewis v. Great Western Railway Co (1877), 37 LT 774, 3 QB 195; Graham v. Belfast & Northern Counties Railway Co, [1901] 2 IR 13; Forder v. Great Western Railway Co [1905] 2 KB 532.
- 94.
S. 53(2) of the CMIA; s. 55 (2) of the MIA.
- 95.
For example, see Institute Cargo Clauses (A), (B), (C), cl 4.1; Institute War Clauses (Cargo), Strikes Clauses (Cargo), cl 3.1.
- 96.
Wilful misconduct of the master and crew to the prejudice of the ship owner which amounts to ‘barratry’ may be an insured peril and thus does not deprive the insured of the protection of coverage. See O’Connor v. Merchants Marine Insurance Co. (1889), 16 S.C.R. 331; Spinney v. Ocean Mutual Marine Insurance Co. (1890), 17 S.C.R. 326.
- 97.
See P. Samuel & Co. v. Dumas (1924), 18 Ll. L. Rep. 211, [1924] All E.R. 66 (H.L.).
- 98.
For a recent example, see Boyda v. Saxbee Insurance Agencies (1975) Ltd. (1984), 4 C.C.L.I. 26 (B.C.C.A.). Hull insurances are almost invariably valued policies. Under a valued policy, the value of subject-matter is conclusive evidence for the purpose of valuation between the insured and the insurer unless there is any fraud: s. 30 (4) of the CMIA.
- 99.
Some insurance policies not only provide coverage for the negligence of employee in the so-called ‘Inchmaree clause,’ but also cover for the loss arising from the negligence of anyone including the ship owners and charterers. For negligence of employee, see s. 53 (1) of the CMIA and Century Insurance Co. of Canada v. Case Existological Laboratories Ltd, [1983] 2 S.C.R. 47, 2 C.C.L.I. 172 and C.C.R. Fishing Ltd. v. British Reserve Insurance Co., [1990] 1 S.C.R. 814, 43 C.C.L.I. 1. For negligence of the insured, see Russell v. Canadian General Insurance Co. (1999), 11 C.C.L.I. (3d) 284 (Ont. Gen. Div.) and Atwood v. Canada (1985), 10 C.C.L.I. 62 (F.C.T.D.). In Williams v. Canada (1984), 7 C.C.L.I. 198 (F.C.T.D.) the court held at 211, “In the absence of express stipulations to the contrary, negligence on the part of the assured or of a person for whom he is or may be responsible does not exempt the insurer from liability though the loss is caused thereby, for one of the main objects of insurance is to protect the assured against the consequences of negligence.” (Emphasis added.)
- 100.
Although an employer may legally sue the negligent employee to recover the money paid to a third party, companies rarely pursue this course of action. See James (1948), p. 557.
- 101.
- 102.
See Institute Cargo Clauses (A), (B), (C), cl 4.2; War Clauses (Cargo) and Strikes Clauses (Cargo), cl 3.2; see also s. 53 (2)(b) of the CMIA; s. 55 (2) (c) of MIA.
- 103.
See War Clauses (Cargo) and Strikes Clauses (Cargo).
- 104.
For example, the Canadian Board of Marine Underwriters (CBMU) Great Lakes Hull Clauses (Sept. 1, 1971) provide at lines 229–232, “In the event of any change, voluntary or otherwise, in the ownership or flag of the Vessel, or if the Vessel be placed under new management, or be chartered on a bareboat basis or requisitioned on that basis, or if the Classification Society of the Vessel or her class therein be changed, cancelled or withdrawn, then, unless the Underwriters agree thereto in writing, this Policy shall automatically terminate…”. This document could be found at http://www.brokmar.com/wp-content/uploads/greatlakes.pdf. Accessed 03 September 2013. Canadian Hulls (Pacific) Clauses (Sept. 1/91) at lines 239–251 and Institute Time Clauses Hulls (1/01/83) in cl 4; (1/11/95) in cl 5; International Hull Clauses (1/11/03) in cl 14 contain similar provisions.
- 105.
The words “sue and labor” were first used in Lloyd’s S.G. policy, which contained a clause requiring the insured “to sue, labour, and travel for, in and about the defence, safeguards, and recovery of the said goods and merchandises, and ship, &c, or any part thereof, without prejudice to this insurance….” (Emphasis added). Although the use of Lloyd’s S.G. policy is now very rare, a clause to the same effect continues to exist in all the modern hull and cargo policies as well as in liability insurance policies. See the Great Lakes Hull Clauses (Sept. 1, 1971), the Canadian Hulls (Pacific) Clauses (Sept. 1/91), Institute Time Clauses Hulls (1/10/83), cl 13.1; (1/11/95), cl 11.1; International Hull Clauses (01/11/03), cl 9.1; Institute Cargo Clauses (A), (B), and (C) (1/1/82), cl 16. See also Strathy and Moore (2003), pp. 183–184.
- 106.
Fudge v. Charter Marine Insurance Co., (1992), 97 Nfld. & P.E.I.R. 91, 8 C.C.L.I. (2d) 252 (Nfld. S.C.); Strive Shipping Corp v. Hellenic Mutual War Risks Association (Bermuda) Ltd (The Grecia Express), [2002] EWHC 203 (Comm), [2002] 2 All ER (Comm) 213 (Q.B.). See also Strathy and Moore (2003), p. 181; Bennett (2006), pp. 750–753.
- 107.
Ss. 79 and 80 of the CMIA; s. 78 of the MIA.
- 108.
The ‘sue and labour’ clauses in Lloyd’s S.G. policy and modern hull and cargo policies all contain express undertakings by the insurer to pay for such expenses. The provisions of s. 79(1) of the CMIA and s. 7(1) of the MIA reflect this marine insurance practice.
- 109.
See Shavell (1987), p. 198.
- 110.
- 111.
The amount an insured pays the insurer above the expected loss/liability is known as ‘risk premium’. Stephens (1995), p. 26.
- 112.
This example is a modified version of the finding of the Norwegian P&I Club, Gard AS. See Gard (2005), pp. 18–19.
- 113.
The difference is $5,000. Before the appointment of the additional crew member, the expected liability was $10,000 (10 % × $100,000) and it would be $5,000 (5 % × $10,000) after the appointment.
- 114.
See generally Shavell (2004), pp. 264–265.
- 115.
See the ‘Hand Formula’ in supra note 16. Posner (2003), p. 168.
- 116.
See for example, De Hahn v. Hartley (1786), 99 E.R. 1130 (K.B.), where the insurer required the presence of 50 crew members. The ship had only 46 at the beginning of the voyage. Though the ship had 52 crews at the time of the insured peril, the insurance was held voidable.
- 117.
The probability of collision incidents may never be zero either because no optimal care can eliminate all the accidents or because there is always some unavoidable accidents due to the elements of the sea. See generally Calabresi (1970), pp. 17–18.
- 118.
Spending more than the expected deductible or the amount above the policy limit will not be undesirable as long as the cost of care is less than the total expected loss or liability.
- 119.
- 120.
See supra note 31.
- 121.
- 122.
Tilley (1986), p. 261.
- 123.
See Abraham (1986), pp. 73–74.
- 124.
- 125.
See Abraham (1986), pp. 67–68.
- 126.
With the removal of monopoly on marine insurance in 1824 in the UK, the marine insurance market became more competitive. The well-built ships could get insurance at a cheaper premium from the market insurers than from their mutual hull insurance clubs. As a result, hull insurance clubs were left with ‘rust buckets’ and were eventually dissolved. Bennett (2006), p. 11 note 42.
- 127.
While in marine insurance determination of the class of a ship or its assignment to a particular risk group mainly depends on its physical strength, in automobile insurance risk classification may be based on the age and gender of an insured, among other factors.
- 128.
- 129.
Such as liability laws for oil pollution from tankers and bunkers, HNS pollution and passengers’ claims all have compulsory insurance provisions. See Chap. 6 for discussion on compulsory insurance.
- 130.
- 131.
Tan (2006), p. 34.
- 132.
See Gard (2005), p. 24. However, the total crew claims in Gard represent the largest claim category in terms of liability payment. Most of the crew claims concern illness and disease.
- 133.
See Gard (2005), p. 24.
- 134.
See Gard (2005) at p. 25.
- 135.
Ten-year statistics (1992–2002) on collision liability in Gard show that collision liability accounts for 3.1 % in terms of number of all P&I claims but 12 % in terms of value. However, the average cost of collision liability is on the rise. See Gard (2005) at p. 18.
- 136.
See Gard (2005) at pp. 3–4.
- 137.
See Abraham (1986), p. 46.
- 138.
See Chap. 3.
- 139.
James (1948), p. 561.
- 140.
James (1948), p. 561.
- 141.
See Stephens (1995), p. 24.
- 142.
- 143.
See Posner (2003), pp. 201–202.
- 144.
- 145.
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Billah, M.M. (2014). Incentive Effect of Liability Rules in the Presence of Liability Insurance. In: Effects of Insurance on Maritime Liability Law. Springer, Cham. https://doi.org/10.1007/978-3-319-03488-1_7
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