Report No. 21
General.-This provides that "defeasible" or a "contingent" interest is insurable.
Buyer's interest.-It also gives a good example of a defeasible interest. While a buyer of goods to whom the goods are shipped acquires the property as soon as the goods are shipped on board,1 he has still a right to reject the goods if they are not of merchantable quality. His interest is, therefore, "defeasible", because it is liable to be defeated during the currency of the agreement by the option of rejection. Nevertheless, his "defeasible" interest is insurable. The significance of section 7 of the English Act lies in making that clear.
Another example is a buyer's interest which is liable to be defeated by stoppage in transit. See sections 44-46 of the (English) Sale of Goods Act, 1893 and sections 50-52 of the Indian Sale of Goods Act, 1930.
Seller's interest.-Where the buyer has a defeasible interest, the seller has a corresponding contingent interest, because, unless the buyer exercises the option to reject the goods, that is to say, unless that "contingency" occurs, the seller's interest does not arise.
"Duty contingency" or "Freight contingency".-It has been stated2 that what is called "duty contingency" or "freight contingency" are also relevant to the subject of section 7. Such insurances are necessary where, during the course of transit, either the freight or the duty becomes payable so that the value of the subject-matter is likely to be enhanced by the amount of such freight or duty. In such cases, in the event of a total loss the risk is excluded, so that if there should be no arrival of ships the duty or freight payable at destination would not be collected.
1. See section 23 of the Indian Sale of Goods Act, 1930 and section 18(5) of the (English) Sale of Goods Act, 1893.
2. Dover, pp. 185, 308.
A partial interest can be insured. It has been held1 that even an undivided interest in a parcel of goods is insurable so that the exact extent of the interest need not be determinable. It has also been held2 that a shareholder in a cable company can effect insurance on an adventure for laying cable from Ireland to New foundland. But this decision has been criticised.3
General.-This deals with re-insurance.
At one time, re-insurance was illegal as a wager policy.4
Re-insurance, it is said, need not be described as such on the face of the policy. Kinds of re-insurance.-There are two kinds of re-insurance:
(a) where the re-insurer accepts liability to pay only the amount which is lawfully payable by the original insurer to the assured, and
(b) where the re-insurer binds himself expressly to accept any terms between the parties to the original insurance.
"To pay as may be paid."-Ordinarily, the contract "to pay as may be paid thereon", though apparently not falling under the first category, has been held to be so falling.
1. Inglis v. Stock, (1885) 100 App Cas 263 (274).
2. Wilson v. Jones, 1867 LR 2 Ex 139.
3. Lord Chorley Shipping Law, 3rd Edn., p. 277, and Arnould, Marine Insurance, para. 249.
4. Marine Insurance Act, 1745 (19 Geo. 2, Ch. 37, section 4) referred to in Shipping Law by Lord Chorley, 3rd Edn., p. 295.
"Bottomry" or "respondentia".-This relates to insurance by a person who lends money on what is called "bottomry" or "respondentia". Bottomry is an advance of money, in time of dire necessity, to a master of a vessel for the purpose of the adventure and arranged after all other means of obtaining funds have failed. The money is advanced on the security of the ship or of the ship with the freight or cargo added. Bottomry bonds are taxable.1 Respondentia is a similar advance, but is secured on cargo only. Such a loan is repayable even though the ship is lost, provided the cargo is saved. Such bonds are also taxable.2
Bottomry bonds rank in priority in reverse, that is, the later ones rank before the earlier ones. 'Loan' presumably includes interest on the loan, also, under this section.
Query-One query which arises is whether after the execution of the bond, the owner of the subject-matter loses his insurable interest to the extent of the loan. In other words, whether, after such bond, the owner's interest is limited to the difference between the amount of the advance and the value of the subject-matter. In modern times, because of the development of communications the occasions for the bottomry bonds are rare. Hence, the provision needs not be elaborated.
1. See the Indian Stamp Act, 1899, First Schedule, Entry No. 16.
2. See the Indian Stamp Act, 1899, First Schedule, Entry No. 56.
This deals with insurance of wages. Prior to the Act, sailors were not allowed to insure their wages, for reasons of public policy. In fact, at one time, they were not entitled to wages unless the freight was actually earned. This was intended to secure that they would fully exert their efforts in time of peril.3
1. See Dover, p. 311.
This deals with advance freights.
As to the meaning of the word "freight", see the rules of construction in the First Schedule to the English Act, rule 16. Out of the various forms of freight,1 only advance freight has been mentioned in this section. Normally, freight does not become payable until the completion of the voyage, and it is until then at the ship-owner's risk. But where the advance freight is stipulated for and the understanding is that the freight will not be refunded if the voyage fails, the shipper of the goods is the proper person to insure. Presumably, it is for this reason that only advance freight has been dealt with specifically in this section. The other kinds of freight would be taken care of by the ship-owner himself and not by the owner of the cargo.
1. See Dover, pp. 231-233.
Insurance of Insurance charges.-The reason for allowing the assured to insure the insurance charges themselves is as follows:-
Premiums of insurance in marine insurance are high. The ship-owner, while calculating his freight, usually includes insurance premium as an element in costing. He expects that his vessel will be utilised throughout the year, and assumes that the profits of the ship for the year will cover the cost of insurance. In other words, he takes it that the ship will earn freight enough to cover the corresponding proportion of the annual premium. If this expectation is not realised, he stands to suffer, and it is that risk which is allowed to be insured under the section.
Disbursement Warranty-pro rata diminishing (Return of premium).-By the "disbursement warranty"1, the ship-owner is permitted to insure upto the total amount of the actual annual premiums. But the amount is reduced monthly by a proportionate amount of the whole. As to return of premium, see section 83 of the Act.
"Full premium if lost".-Where the policy is for a period of twelve months, the sum insured on account of premium usually represents the full twelve months' amount. Where, however, the policy is for a shorter period, the insurance of the ship is often arranged on "full premium if lost" terms.2 Here, if there is a total loss by an insured peril or otherwise, the balance of the twelve months' premium is payable to the insurers. In these circumstances, the total loss increases the premium liability of the ship-owner, and he has an insurable interest in the full twelve months' premium, subject to pro rata diminishing as above.
"On arrival".-Non-return of premium-that is, in cases where a return of premium is negatived by "on arrival" provisions,-is also insurable.3 The return clause provides for a pro rata monthly return of each commenced month if the policy is cancelled by agreement. The return, is, however, "on arrival", in the sense that the refund of premium is not claimable unless the period covered by the policy runs off without total loss. In such cases, the premium is not returnable-and that risk of non-return itself can be insured.
1. See Dover, pp. 152, 154, 158, Keate, p. 102.
2. Dover, p. 313.
3. Cf. Section 83 of the English Act-clause 84.