Open Cover in Marine Insurance

Open cover insurance is mainly used in international trade for cargo insurance.

These contracts offer substantial advantages, streamlining administration and boosting operational efficiencies. They offer cost savings over individual policies and facilitate easier management of multiple shipments, making them an economical option for frequent shippers.

Sunset over the bustling port of Mallorca, illustrating the vital role of marine insurance in international trade.

Open covers in marine insurance obligate insurers to cover all forward shipments that meet the pre-agreed terms within the policy duration, providing blanket coverage over a specified period.

These contracts are typically adopted by businesses that frequently ship goods, specifically by companies involved in high-volume trade over long periods.

This is because open-cover policies in marine insurance offer a reprieve from the frequent contract negotiations required by standard insurance. For shippers, they streamline the insurance process for consistent trade types, offering procedural simplicity and potential cost savings. From the insurer’s perspective, such policies simplify administrative tasks and ensure premium revenues.

1. What is a Marine Open Cover?

An open cover is an agreement between the insurer and the insured.

It is an arrangement designed to automatically cover all forward shipments by an insured party that meet specific pre-agreed criteria detailed, like terms, rates, and conditions, within the open cover policy. This relationship is pivotal as it dictates the duties and responsibilities of each party under the terms of the contract.

Open covers are generally structured as long-term contracts, often spanning an annual period to provide ongoing coverage. However, they can also be arranged as ‘always open’ or permanent covers, which remain effective until explicitly cancelled.

Unlike standard policies that define precise details upfront, during that period open covers allow the specifics, such as cargo weight and value, to be declared subsequently as shipments occur.

This flexible arrangement doesn’t provide a fixed sum insured but instead, adjusts coverage based on aspects like Possible Maximum Loss (PML) or Single Cargo Limit (SCL).

For instance, a multinational company might use an open cover to insure different crude oil shipments weekly, with details like source, tonnage, and value specified for each shipment.

Open cover can be structured with premiums paid from a cash deposit account held by the insurer, offering consistent coverage and financial stability with routine premium adjustments. Alternatively, premiums can be calculated per shipment based on each issued insurance certificate, providing a payment structure that aligns more logically with the actual movement of goods.

2. Advantages of Open Covers

  • Open cover policies reduce the need for individual endorsements for each shipment, streamlining administrative processes.
  • Premiums are often lower due to reduced administrative costs compared to individual policies.
  • Facilitates quicker insurance responses for multiple shipments, enhancing operational agility in fast-paced markets.
  • Enables easier price negotiations and budgeting for the assured.
  • The insured or their brokers can typically issue their own certificates.
  • An inadvertent omission to declare a shipment does not prejudice the insured, provided it is rectified promptly.

3. Open Cover Key Features

3.1 What’s Covered?

Open covers insure a wide array of goods, including those owned by the assured as well as those under their care, control, and custody for which they have insurance obligations.

This inclusive approach ensures coverage extends to all goods handled in the course of business activities, even if the assured does not own them.

The wording in typical open cover policies is deliberately broad to encompass all types of goods and interests that the assured may be involved with, whether directly or indirectly. This includes responsibility for insuring goods, legal liabilities, or following instructions to insure specific shipments.

However, the goods insured must be accurately and reasonably described in the policy to avoid issues such as non-coverage for errors in the description or misinterpretation of insured goods, as highlighted in legal precedents.

Some open covers also specify exclusions, like precious metals or dangerous goods, which might only be covered under specific conditions or additional rates. This breadth of coverage ensures that businesses can operate with confidence, knowing that their diverse shipping needs and potential liabilities are comprehensively addressed by their insurance policies.


3.2 Valuation of Goods

In terms of valuation, as other Cargo insurance policies, open covers usually adopt a CIF plus 10% valuation basis to accommodate potential profit margins, but they also cover complex scenarios like returned goods and used machinery with specifically tailored valuation bases. A basis of valuation of goods is a prerequisite in an open cover.


3.3 Modes of Transport

An open cover not only covers sea transport but also extends to other modes of conveyance. This includes rail, road, parcel post, courier services, and other connecting conveyances.

Craft risks, which are risks associated with smaller vessels used within port limits or to and from mid-stream anchorages (places where ships are anchored away from the port), are typically covered under the terms of an open cover if specified.

When high-value items are transported, especially in the insured’s own vehicles, the risk profile changes. Using personal or company vehicles can increase the risk because traditional avenues of recourse that exist when third-party carriers are used (like claims against a transport company’s insurance) might not be available.

Another specific consideration might be the quality of vessels used for transport, Insurers may adjust the terms of coverage based on the type of vessels involved in the transportation of insured goods, possibly requiring higher standards of maintenance or specific vessel types for certain kinds of cargo.


3.4 Global Coverage

Open cover policies typically compensate for physical loss or damage to insured items, as well as any related liabilities or expenses, according to the conditions outlined in the policy schedule. Common features include:

  • The cover provides all-risk protection in accordance with the ICC (A) or ITC (A) standards.
  • Protection against damage from accidents or fire during the journey is included in the cover.
  • The specific terms of coverage chosen will determine the premium rate.
  • Compared to the all risks cover, the basic cover is less expensive and only protects against specific risks.
  • The policy includes coverage for War and SRCC (Strikes, Riots, & Civil Commotion).
  • Theft, Pilferage & Non-delivery (TPND) are covered under the basic cover only.
    Buyers have the option to choose additional storage cover before the cargo is delivered.

3.5 Limits of Liability

Open cover usually specifies two main types of limits:

1. Per Bottom Limit
This refers to the maximum sum insured for goods aboard any one ship, which is determined based on the anticipated highest value of goods shipped.

Insurers might also include sub-limits for other modes of transport like rail, road, or air, especially when the ocean-going shipment limit is high, to prevent these limits from applying universally.

2. A location limit
Almost always included in open covers, this limit applies to the maximum value at a single location, usually set at double the per bottom limit. This covers unforeseen accumulation of goods at a location during transit.

For multinational groups, this is particularly crucial as large accumulations at ports can pose significant risk, highlighted by scenarios like a tsunami destroying several shipments at once.

Despite its importance, the definition of “location” often lacks clarity and consistency among insurance practitioners.


3.6 Certificate of Insurance and Good Faith

As with any other insurance contract, open cover is grounded in the principle of “utmost good faith,” obliging the insured to fully disclose all relevant information that could affect the risk assumed by the insurer. Non-disclosure can lead to the avoidance of the policy.

To facilitate this, insurers provide certificates that must be completed with each cargo shipment, detailing cargo value, travel period, and location. These certificates help manage the cumulative value of insured cargo, which is capped under the policy’s terms for a specific period.

Particularly under terms like CIF and CIP, these certificates are relevant because where the seller must secure marine cargo insurance for the buyer’s benefit. Open covers typically allow the broker, agent, or the assured to issue pre-signed insurance certificates.

In certain markets, these may require the assured’s countersignature to activate. Challenges arise with duplicate certificates, which are sometimes demanded by overseas buyers or banks. To mitigate risks associated with duplicates, it is recommended to limit their issuance and clearly mark any duplicates to specify their status.


3.7 Exclusions

Open cover typically excludes:

  • Insolvency of carrier
  • Wilful misconduct of the assured
  • Ordinary leakage in case of liquid cargo
  • Ordinary loss in weight
  • Improper packing
  • Inherent vice
  • Ordinary wear & tear
  • Cyber failures and malicious usage.

4. Considerations for Shippers and Insurers

4.1 Applicable legislation

The legal framework that will govern the open cover policy, should be agreed upon by both parties involved in the contract. This includes specifying the proper law that will apply to interpret the terms of the contract and the jurisdiction under which any disputes will be settled. Choosing the correct legal framework can affect everything from contract enforcement to dispute resolution processes.


4.2 Cancellation

An open cover policy in marine insurance continues until canceled, structured to provide continuous protection under agreed terms.

Cancellation can be initiated by either the insurer or the assured due to dissatisfaction with terms or a reevaluation of risks, though such cancellations are uncommon.

The cancellation notice typically takes effect 30, 60, or 90 days from the date it is issued or received. Some policies only allow cancellation at the renewal date, preventing mid-period termination.

Importantly, cancellations do not affect shipments already covered prior to the notice period’s expiry. If the policy includes stock throughput or storage, the cancellation terms should clearly state that insurers are not liable for storage risks post-cancellation.


4.3 Transfer

Circumstances under which the insurance coverage can be transferred to another party, if at all, must be stipulated. This is particularly relevant in scenarios involving the sale of the insured goods or changes in the ownership of the company being insured. Both parties should understand the procedure and conditions under which a transfer can be legally and effectively executed.


4.4 Period

The inception and termination dates either specify the local standard time at the place (or storage locations insured, if any) where shipment commences or the local standard time at the principal address of the assured.

Conclusion

In marine insurance, open covers are essential for businesses engaged in regular shipping activities. These policies provide a safety net against the myriad risks associated with marine transportation and offer flexibility crucial in the dynamic global trade environment.

Insurers evaluate various factors such as the type of goods shipped, shipping routes, and the overall risk profile of the shipper when offering open cover. Shippers should consider adopting open cover to streamline the management of extensive and continuous shipments, as it significantly reduces the complexities of handling multiple insurance contracts.

Underwriters assess the possibility of providing open cover based on detailed risk evaluations, the shipper’s claims history, and adherence to safety and packing standards. Therefore, shippers must maintain high standards of operational transparency and regulatory compliance to qualify for and derive maximum benefit from open cover policies.

For expert advice and tailored legal solutions that secure your assets and operations, reach out to a specialized team of lawyers today.

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