2: Classes of business

Chapter 2
Chapter section
A Marine insurance
B Aviation insurance
C Property insurance
D Liability insurance
E Insurances of the person
F Motor insurance
G Other insurances

Learning objectives
After studying this chapter, you should be able to:

j list the key features of the main classes of risks written in London, including the main forms of cover
given; and;
j outline the losses and liabilities which may give rise to claims under the main classes.;

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Introduction
The first class of insurance to be introduced to Britain was marine insurance. Other forms of
insurance developed over the centuries as external demand grew from society and industry; and
the emergence of the various classes of insurance now written in the London market reflect this
historical development.

In this chapter we will review the main classes of business transacted in the London market.

Insurance business is often termed long-tail or short-tail:

• Long-tail business is the term used to describe a risk that may have claims notified, or
settled, long after the policy has expired. The term is most often used to describe liability
risks, rather than those for physical damage.
• Short-tail business is the term used to describe a risk where all claims are likely to arise
and be settled either within the policy period or shortly afterwards, i.e. claims for physical
damage.

A Marine insurance
Marine insurance is an essential feature of international trade and the London market occupies
a leading place in the world marine insurance market. Marine insurance has developed its own
terminology and is the only class to have terms defined within a UK Act of Parliament, the
Marine Insurance Act 1906 (MIA 1906). The MIA 1906 neatly brought together all the pre-
existing law into one piece of legislation.

A1 Scope of marine insurance

Marine insurance provides an indemnity against the majority of losses which can occur whilst a
vessel is at sea or whilst a cargo is at risk during a maritime transit and may extend to losses on
inland waters and on land.

A2 Who may insure

Anyone who has an insurable interest in a ‘marine adventure’ may insure; shipowners,
charterers (those who hire out all or part of a vessel), and those exposed to liabilities to third
parties.

Additionally any party who may be at risk from loss of freight (the price charged by shipowners
to cargo owners for carrying their cargo) or passage money arising from exposure to maritime
perils also has an insurable interest. Master and crew also have an insurable interest in their
wages.

Cargo owners, traders and merchants may also have an interest, as do owners, or co-venturers
in property involved in the offshore oil and gas industry. (‘Marine adventure’ is a term used in
the Marine Insurance Act 1906 and is defined in s.3 of the Act.)

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A2A Policy proof of interest policies

In marine insurance it has become customary to issue policies where there is no need to
establish insurable interest. Such policies are termed policy proof of interest (PPI) policies.

Chapter 2
Policies of this type are used to insure nebulous interests, for example, shipowner’s
disbursements, such as equipment or consumables on board not being part of the vessel, or
possible increases in values by reason of rising markets. These policies are treated by insurers
as binding in honour but they are not binding at law, which means, in practical terms, that if a
claim was presented, and the insurer refused to pay, the insured could not sue.

A3 The London market marine insurance policy

In marine insurance a standard policy form is used which is called a ‘jacket’ (essentially the
front and back cover of the policy document which lists the specific cover and contains certain
standard clauses). The precise details of the risk are then spelled out in the policy document that
is inserted into the jacket. Non-marine insurers also use jackets.

The standard jacket in use in the London marine market is known as the MAR form. It is used
for hull, cargo and freight risks, with appropriate detailed clauses attached. Clauses in common
use in the London market are referred to as Institute clauses, after the Institute of London
Underwriters (ILU), where many of them were initially developed. The ILU is now part of
the International Underwriting Association of London (IUA), and the clauses continue to be
drafted by joint committees of Lloyd’s and IUA member companies. In addition, many insureds,
brokers and underwriters have their own special wordings.

A4 Insurances of hulls
The standard hull clauses commonly used in the London market are the Institute Time
Clauses 1/10/83, although more modern clauses exist, for example, the International Hull
Clauses 01/11/03.

The older clauses are still preferred by brokers and insureds; however, hull insurers will also
write business using overseas clauses from the USA, Germany and Norway amongst others. All
the clauses have differing provisions, some of which benefit insureds and some benefit insurers.
The choice of clause is part of the negotiation that takes place when the risk is placed.

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 Lloyd’s and London Market Introductory Test

The ITC 1/10/83 provides cover against the following perils:

6.1.1 Perils of the seas, rivers, lakes or other navigable waters.

6.1.2 Fire, explosion.
6.1.3 Violent theft by persons from outside the Vessel.
6.1.4 Jettison.
6.1.5 Piracy.
6.1.6 Breakdown of or accident to nuclear installations or reactors.
6.1.7 Contact with aircraft or similar objects, or objects falling therefrom, land conveyance,
dock or harbour equipment or installation.
6.1.8 Earthquake, volcanic eruption or lightning.
6.2.1 Accidents in loading, discharging or shifting cargo or fuel.
6.2.2 Bursting of boilers, breakage of shafts or any latent defect in the machinery or hull.
6.2.3 Negligence of Master, Officers, Crew or Pilots.
6.2.4 Negligence of repairers or charterers provided such repairers or charterers are not an
Assured under the policy.
6.2.5 Barratry of Master, Officers or Crew.

provided such loss or damage (in section 6.2) has not resulted from want of due diligence by the
Assured, Owners or Managers

Barratry is a word only used in marine insurance and means a wrongful act committed by
the master or crew of a vessel causing damage to the ship, cargo (as long as the owner is not a
consenting party)

The clauses also cover ¾ths of any sum paid out by the assured as a result of its legal liability
to another vessel following a collision, as well as the same proportion of any costs incurred in
defending any action after such a collision. This coverage is limited to ¾ths of the insured value
of the ship in total.

In this context the use of the word ‘assured’ in the clauses has the same meaning as ‘insured’
used elsewhere in this book.

There are various other options available to cover the remaining quarter, usually available
through a P & I Club (see chapter 6, section E).

The policy is subject to a deductible.

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 2: Classes of business

A5 Insurance of cargo
Cargo insurance covers physical damage to, or loss of, goods whilst in transit. Cargo insurance
is often provided by means of one of three Institute Cargo Clauses, A, B or C, plus War Clauses

Chapter 2
and Strikes Clauses. In outline, Cargo Clauses A give the most cover with B and C giving less
coverage, as is reflected in the premiums charged. These clauses are intended for use with the
MAR form of policy jacket described in section A3 above.

• Institute Cargo Clauses (A): cover ‘all risks’ of loss or damage subject to certain stated
exclusions. It is important to remember that even all risks forms do not cover every
eventuality. As well as the exclusions, the loss or damage must have been caused by a
fortuity.
• Institute Cargo Clauses (B): offer cover against major perils, such as fire, explosion,
sinking, stranding and capsizing. They also provide wider coverage by insuring against
earthquake, volcanic eruption and lightning, as well as water damage.
• Institute Cargo Clauses (C): provide basic standard cover against major perils such as fire,
explosion, sinking, stranding and capsizing.

There are other more specific cargo clauses in use for insuring shipments of various cargoes
such as frozen food or meat, bulk oil, commodities, oils, seeds, fats and rubber.

A5A Open covers

Many firms engaged in international trade make large numbers of shipments. It is impractical
to insure every one of these shipments individually, so various kinds of long-term contracts are
available from insurers.

The most popular is the open cover. This is an agreement between a merchant or shipper and
an insurer under which all the movements that it covers are automatically insured. An open
cover is for an agreed period of time, usually 12 months. It will state the conditions under which
future policies for specified goods will be issued.

An open cover has a schedule of rates for various voyages, against which the assured declares
individual shipments as and when they occur. The broker raises a premium debit, based on the
rating schedule and values declared for insurance. Pre-printed certificates are often issued for
the assured to enter the individual shipment details.

For example, a large frozen food supplier knows that he will send many shipments around the
world each year, but does not know exactly what they are and when at the beginning of each
year. Without an open cover he would have to arrange insurance for each shipment individually
which would be time-consuming and expensive. With an open cover he can advise insurers at
the beginning of the year what he plans to do in broad terms and pay the applicable premium
throughout the year as he ships.

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A5B Responsibility for arranging cargo insurance

Responsibility for effecting cargo insurance is dictated by the contract of sale of the goods being
moved. As part of the sale negotiations, the parties agree who will be responsible for shipping
and insuring the goods for delivery to the buyer’s location. There are standard terms given as
reference in such contracts. The most commonly used are:

• CIF (cost insurance freight): In CIF contracts, the seller of the goods is responsible for
arranging delivery of the goods to the buyer by booking all the transport (e.g. road hauliers
and vessels), paying the charges (the freight) and arranging the insurance. The buyer is
charged an inclusive price: the cost of the goods, the freight and the insurance (CIF).
• FOB (free on board): In FOB contracts, the seller is responsible for arranging for the goods to
be delivered free on board to the ocean vessel at the loadport, where the seller’s responsibility
ceases. The buyer arranges to pay the freight and the insurance for the shipment.

Cargo policies are unusual in that they are freely assignable because often goods are bought
and sold whilst in transit. The policy is often evidenced by an insurance certificate issued for a
specific shipment which can then be endorsed over to the buyer, as a document ‘of title’ if the
goods are sold during transit. The policy or certificate will be endorsed by each person in the
chain by signing the reverse of the document and passing it on.

A6 Energy insurance
Energy business presents some of the most complex risk management challenges in the
insurance industry. It is generally written in the marine market because the exploration and
production elements of the industry are often offshore drilling platforms. However, property
insurers may also deal with this business, by insuring onshore oil and gas refineries, terminals,
distribution pipelines and so on.

The values involved can be very large indeed. The subscription basis on which the London
market works helps to ensure that risks are well spread, facilitating provision of insurance.
Coverage is also available for the liabilities arising from this sector.

The subscription market is discussed further in chapter 9.

Specialist underwriters and brokers are experts in the energy sector and typical coverage
includes a mix of exposures. This may include not just pure property physical damage, but also
business interruption, and expense coverage such as control of well and redrill costs. On the
liability side, coverage may include general third party liability, employers’ liability and seepage
and pollution.

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A7 Period of cover
Ships and cargo are insured for a period of time, for a voyage, or for ‘mixed time’, i.e. time and
voyage. For example:

Chapter 2
• A time policy could state that it provides cover for ‘12 months from 00.00 1/1/06, GMT.’
• A voyage policy could state that it provides cover from ‘Southampton to Durban.’

Cargo is insured for the voyage and usually on a warehouse to warehouse basis, thus covering
an element of land-based transit of the goods at either end of their voyage. The risk usually
terminates on arrival at the warehouse or the destination named in the policy or 60 days after
discharge from the ocean vessel, whichever is the sooner.

Shipbuilders’ risks are insured during construction ashore (from the time the keel is laid to
launch), sea trials and until the vessel is delivered by the shipbuilder to the shipowner.

Drilling rigs and platforms are insured for construction, the voyage to the site, placing on the
site, further construction until the complex is completed and thereafter whilst operating.

A8 Claims
Losses in marine insurance are separated into two main categories, total losses and partial
losses.

A8A Total loss

A total loss may be either an actual total loss or a constructive total loss. These terms are defined
in the MIA 1906.

An actual total loss (ATL) means that the subject matter insured is destroyed or so damaged as
to cease to be a thing of the kind insured, or that the assured is irretrievably deprived of it.

Examples are:

• A vessel that has sunk to the bottom of the ocean, beyond recovery.
• Cement in contact with water, so that it becomes concrete.
• Timber that is burnt and becomes charcoal.
• A vessel seized by the government of a country as a political act.

A constructive total loss (CTL) occurs when the subject matter insured is abandoned because
an actual total loss appeared to be unavoidable, or because it could not be saved without
expenditure that would exceed its value.

In the case of an insurance of a ship, the ship becomes a constructive total loss if the cost of
repairing damage exceeds the value of the ship when repaired. In the case of an insurance of
cargo, the goods insured become a constructive total loss if the cost of repairing damage and
forwarding the goods to their destination would exceed their value on arrival.

The MIA 1906 states that where there is a constructive total loss, the insured may either treat
the loss as a partial loss, or abandon the subject matter to the insurer and treat it as if it were an
actual total loss (MIA 1906 s.61).

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Abandonment means that the insured abandons his interest in the subject matter
unconditionally to the insurer. If the insured decides to adopt this option he must formally give
notice of the abandonment. If he fails to do so, the loss can be treated as a partial loss only (MIA
1906 s.62).

In practice, insurers generally decline the notice of abandonment, although, after payment of
the claim, they are entitled to take over the interest of the insured in what is left of the subject
matter insured.

Examples of constructive total losses are:

• A vessel is insured for $10M. She has a major collision. The repair yard can fix her, but it
would cost $11M to do so. The vessel is treated as a CTL and the insurers pay the insured
$10M. This is similar to a motor vehicle being written off after a road traffic accident.
• A cargo of sugar in bags is insured for $3M but has become wet and has turned into syrup.
Whilst it could be pumped out of the vessel and treated this would cost at least $5M. This
loss is a CTL and the insurers will pay $3M.

Although, having paid a CTL, insurers are entitled to take ownership of the subject matter
insured (i.e. the ship or the sugar), this is rarely done in practice because of the logistical
difficulties involved. In the case of vessels, the ship-owner may want to keep the vessel. If so the
insurer will have the ship valued in its damaged state and the insured can purchase it from the
insurer as part of the final claim calculations.

A8B Partial loss

Any marine insurance loss other than a total loss is a partial loss. Total loss of part of the subject
matter insured is a partial loss.

An example of this would be total loss of 50 bags of sugar out of a total shipment of 150 bags.
Although a portion of the insured goods is a total loss, the loss is treated as a partial loss looking
at the whole cargo together.

A8C General and particular average

The word ‘average’ in marine insurance has a different meaning from that in non-marine
insurance or, indeed, in general use. It means ‘partial loss’. It appears in two technical phrases:
‘general average’ and ‘particular average’.

General average
A general average loss is a loss arising from a general average act. A general average act is
defined in the MIA 1906 s.66 as:

Where any extraordinary sacrifice or expenditure is voluntarily and reasonably made

or incurred in time of peril for the purpose of preserving the property imperilled in the
common adventure.

The person on whom the costs of a general average act falls is entitled to contributions from the
other interested parties, to help cover the loss he has sustained. This is termed a ‘general average
contribution’. All parties involved in the voyage, therefore, share a general average loss. Any
sacrifice or expenditure must save the ‘adventure’ for general average to operate.

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 2: Classes of business

Marine insurance policies normally cover the liability of the vessel and cargo owners to make
a general average contribution, provided the general average loss was incurred to avoid an
insured peril.

Chapter 2
General average arises independently of insurance and has been a feature of international
marine trading for hundreds of years.

Examples of general average are:

• A vessel strands after leaving port and requires a tug to assist. The vessel then has to be
towed to a port of refuge to undertake temporary repairs which requires the discharge of
cargo. The expenses incurred by the shipowner will form the basis of a claim for general
average expenditure.
• In a heavy storm, a vessel is in danger of capsizing. In order to save his vessel and the other
cargo on board, the master can declare a general average and order the jettisoning of all his
deck cargo.

Where general average is declared, all interested parties (including the owner of the sacrificed
goods) bear a share of the loss.

Particular average
A particular average loss is a partial loss of, or damage to, the subject matter insured, caused by
a peril insured against, which is not a general average loss. Examples include seawater damage
to 100 tons of wheat out of a shipment of 10,000 tons, or damage to the side plating of a vessel
hitting a harbour wall. It is essential that loss or damage is accidentally and fortuitously caused
by an insured peril.

A9 Sue and labour

It is a general principle of insurance that the insured should act prudently as if the insurance were
not in force and, therefore, take reasonable steps to prevent or reduce loss. This principle is given
legal force by the Marine Insurance Act 1906, which requires the insured and his agents ‘to take
such measures as may be reasonable for the purpose of averting or minimising a loss’. The phrase
‘sue and labour’ also arises from the Marine Insurance Act which promotes the use of standard
policy language authorising the insured ‘to sue, labour and travel for, in and about the defence,
safeguards, and recovery of the said goods and merchandises, the ship and or any part thereof,
without prejudice to this insurance: to the charges whereof we the insurers will contribute’.

The standard clauses in use in the market generally make it an express duty upon the insured to
‘sue and labour’ in order to minimise a loss which would be covered by insurance and insurers
agree to contribute to reasonable expenses, usually referred to as ‘sue and labour charges’,
incurred in the execution of this duty. ‘Reasonable expenses’ do not include general average or
salvage charges, and the Marine Insurance Act also confirms that expenses which are incurred
in respect of a loss which is not caused by an insured peril cannot be recovered.

An example of this would be a ship-owner using his initiative and obtaining some additional
pumps to try and prevent a vessel taking on water after a collision.

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 Lloyd’s and London Market Introductory Test

B Aviation insurance
The use of aircraft as a means of transport increases every year. Because of the specialist and
technical nature of the risks associated with it and the high potential cost of accidents, all
aviation risks (from component parts to complete jumbo jets) are insured.

The buyers of these policies include large commercial airlines, airframe and component
manufacturers, airport operators, corporate aircraft owners, private owners and flying clubs.

Certain legal liabilities and, thus, the liabilities insured are governed by international
conventions and agreements.

B1 The aviation policy

The standard aircraft policy covers:

• Section 1. Loss or damage to the aircraft.

• Section 2. Legal liability to third parties other than passengers.
• Section 3. Legal liability to passengers.

B1A Loss or damage to the aircraft

The policy will pay for, replace or repair accidental loss or damage to the aircraft arising from
risks covered, including disappearance if unreported 60 days after commencement of flight. The
policy will also pay reasonable emergency expenses up to 10% of the sum insured.

The policy excludes wear and tear, breakdown and damage which has a progressive or
cumulative effect.

B1B Legal liability to third parties other than passengers

The policy covers legal liability and agreed legal costs for bodily injury or damage to property,
subject to limits for each person and each accident.

B1C Legal liability to passengers

The policy covers legal liability and agreed costs in respect of claims from passengers for injury
or damage to, or loss of, personal effects and baggage, subject to limits for each passenger and
each aircraft.

B2 Insurance of space risks

Space insurance covers satellites and other space vehicles. Coverage tends to be split between launch
risk and ‘in orbit’ risk, with most losses occurring at the time of launch. Cover may be purchased
separately or as a combined package – for example, the cover may be for launch plus three years in
orbit. The policy covers material damage to the satellite and may cover loss of revenue.

Satellites are launched into orbit using rockets or the space shuttle. At the beginning of the space
age failures were very common: in 1958, 20 out of 28 launch attempts failed. Development of
a space insurance market required a greater level of consistency, which came as the experience
of space agencies grew. In recent years there have been around 100 launches a year, with launch
failures below 5%. Many launches are of more than one satellite, affecting the size of the sum
insured on a policy.

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When pricing a risk, a space insurer may take into account the launch site and the launch
vehicle used. Different launch vehicles have different records of success, although many makes
of rocket do not carry out enough launches for their performances to be properly assessed.

Chapter 2
B3 Other forms of cover
A wide range of other aviation risks is insured. These include:

• Products legal liability: covers the legal liability of manufacturers or repairers.

• Airport liability: covers the legal liability of airport operators for claims for bodily injury or
damage.
• Cargo: gives ‘all risks’ cover for the whole of the transit.
• Loss of licence: covers aircrew who lose their licences in the event of being unfit through
accident or illness. It does not cover crew who lose their licences through their own actions,
such as drinking on duty etc.
• Loss of use: covers loss of earnings following an aircraft being laid-up for repairs.
• Personal accident: policies may be effected by passengers or aircrew for their own benefit.
Firms may provide automatic personal accident cover to passengers.

C Property insurance
Property insurance covers physical loss or damage to property. It may be extended to cover the
financial consequences of such loss (known as business interruption insurance).

Typical property coverages include:

• fire (which may include other perils);

• business interruption;
• theft (which may include burglary and robbery);
• money;
• jewellers’ block;
• bankers’ blanket bond;
• builders and contractors;
• household;
• fine art.

C1 Fire insurance
Insurance companies have underwritten fire insurance for hundreds of years. A typical fire
insurance policy covers loss or damage caused by:

• fire and/or lightning;

• fire consequent upon explosion wherever explosion occurs;
• explosion consequent upon fire on the premises insured; and
• explosion of domestic boilers and/or gas used for domestic purposes.

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 Lloyd’s and London Market Introductory Test

C1A Additional perils

Additional perils may be added to a fire policy at an additional premium. These may be
classified as follows:

• chemical perils – for example, explosion (just on its own, no fire needed);
• social perils – for example, riot, civil commotion and malicious damage;
• natural perils – for example, storm, tempest, flood, earthquake; and
• miscellaneous perils – for example, burst pipes and water damage, aircraft or other aerial
devices or articles dropped therefrom, impact by vehicles, horses or cattle, sprinkler leakage
(although sprinkler leakage can be written as a stand alone policy.)

C1B Business interruption insurance

The fire insurance policy covering material damage makes no provision for loss of earnings, or
additional expenses incurred in maintaining or re-establishing the business after damage.

A fire in business premises can cause serious interruption or dislocation to the business. The
consequences may include diminution of trade for a time following the damage, and the
continued obligation to meet certain standing charges (such as salaries and National Insurance)
even though the business has sustained a drop in income.

A business interruption policy covers the loss in profit due to the reduction in the volume of
trade as a result of the damage and its impact on the cost of working.

C2 Theft insurance
Like a fire policy, a theft policy provides compensation to the insured in the event of loss of the
property insured.

In the UK, the law relating to theft is set out in the Theft Act 1968 which defines ‘theft’ as:

Deliberately misappropriating the property of another with the intention of

permanently depriving them of it.

This legal definition is wider than the cover that insurers wish to provide. Insurers, therefore,
only cover loss of or damage to property within the premises by theft or attempted theft
following entry to or exit from the premises by forcible and violent means. This means that,
for example, shoplifting is not covered.

A theft insurance policy may well contain conditions requiring the insured to take certain
security precautions.

C3 Money insurance
A money insurance policy covers loss of money (which includes a wide range of notes, cheques,
bankers’ drafts, stamps, tokens, vouchers, etc.) in transit, on specified premises and in a bank
night safe. The policy may be extended, at an additional premium, to cover bodily injury arising
from theft of money.

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C4 Jewellers’ block insurance

This ‘all risks’ policy was one of the first non-marine classes of insurance developed at Lloyd’s, to
protect jewellers in the event of physical loss of or damage to their stock on their own premises,

Chapter 2
in vaults or in transit.

The policy covers stock and merchandise used in the conduct of the insured’s business and bank
notes against any loss or damage from any cause whatsoever whilst in territorial limits. The policy
also covers premises, trade and office fixtures, fittings, etc. against a wide range of perils. The
policy contains strict limits for certain losses specified in the policy such as thefts from salesmen.

C5 Fine art insurance

A fine art insurance policy protects specified works of art against defined perils. Typically, the
policy is arranged on an ‘all risk’ basis, subject to certain exclusions. Cover may be arranged for
private collectors, art dealers, auctioneers, museums or exhibitors.

It is usually a pre-condition of coverage that a full inventory of insured items and values is
maintained and cover is often provided on an ‘agreed value’ basis, to guard against disputes
arising as to an item’s value once a loss has taken place. Agreed values are normally based on
valuations provided by professional experts such as the international auction houses.

In a fine art policy, partial loss or damage is typically termed as ‘depreciation’ and assessed as a
percentage of the value of the item, pair or set. A picture which has suffered water damage will not
be as valuable as if it had not suffered the damage. The depreciation percentage is then applied to
the agreed value; however, if the item is a total loss, then the full agreed value will be paid.

The principal exposures for private collections are fire, theft or water damage, caused, for
example, by burst pipes. Commercial risks also have theft exposure, and works of art may be
damaged in transit between a buyer or seller, or when loaned to an exhibition.

C6 Insurance of private homes

Insurance of homes and their contents is widely available from insurance companies and is
commonly offered on standard terms and conditions. The London market’s primary products
tend to be large or non-standard risks, so it is not a major provider of home insurance.
Nevertheless, some home insurance is underwritten, often via binding authorities (see chapter
10). This includes cover for homes that local insurance markets find it more difficult to deal
with, such as high value homes or homes with particular risk features.

In the UK, private individuals can choose whether to purchase a single policy with different
sections covering damage to the house building and damage to, or loss of, contents, or to
purchase the cover separately. Buildings insurance is often purchased from the bank or building
society providing the mortgage with which the house has been bought.

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The building section of a UK home policy typically covers loss or damage to buildings from
specified perils, accidental damage to glass, sanitary fittings and underground services, the cost
of alternative accommodation should the house be uninhabitable and property owners’ liability.
The contents section covers contents against loss or damage from specified perils and accidental
damage to electrical equipment. Extensions are usually available, such as legal expenses insurance,
wider accidental damage cover, and cover for personal possessions outside the home. Contents
cover is usually provided on a ‘new for old’ basis, so the principle of indemnity does not apply.

London market insurers providing home insurance in other countries have to bear in mind
local risks (such as hurricanes in Florida or bush fires in Australia) and local regulatory
and legal requirements for home insurance, which are usually more onerous than those for
commercial insurance.

C7 Goods in transit insurance

The policy provides ‘all risks’ cover for property being loaded onto, carried on or unloaded
from motor vehicles and trailers, including temporary garaging during the transit in the United
Kingdom. The policy may be extended to rail, post or other forms of transit. Goods in transit
insurance can also encompass liability insurance for the carriers themselves.

C8 Bankers’ blanket bond insurance

A policy which provides for all the insurance needs of banks is commonly known as a ‘bankers’
blanket bond’. A typical bankers’ blanket bond insurance covers:

• Infidelity: i.e. employee dishonesty. Coverage usually excludes trading losses arising through
the negligent acts of employees (i.e. breaching trading guidelines).
• Valuable property on banks’ premises: this covers cash, bullion, etc. on the bank’s
premises, whether at a counter or in vaults.
• Valuable property in transit: most policy wordings restrict coverage to property loss while
items are in the custody of any employee or an armoured car or security company. It is
possible to purchase cover of property sent by registered post, air freight or other forms of
transportation.
• Forgery: cover against a financial loss resulting from having acted in good faith upon
written instruments or payment instructions if these prove to be forged, fraudulently altered,
lost or stolen or bear a forged signature.
• Forged/counterfeit securities: losses arising from situations in which the insured has acted
upon any forged or fraudulently altered securities. This is now frequently extended to cover
uncertified (i.e. electronic) securities and the statements representing them.
• Counterfeit currency loss: losses arising from the insured acting upon counterfeit currency,
for example, the encashment of counterfeit currency. This cover is particularly beneficial for
institutions handling foreign currencies or with Bureau de Change facilities.
• Damage to office and contents: covers the costs of replacing equipment and the
reconstruction of premises due to loss and damage incurred as a result of robbery, hold-up
or burglary.

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The policy may be extended to cover:

• computer fraud;

Chapter 2
• safe deposit box liability; and
• kidnap and ransom.

Cover is typically arranged to protect all branches of the bank in a single policy. However, key
vault exposures may be very significant and require additional specialist coverage up to high
values.

C9 Builders’ and contractors’ insurance

This form of insurance arose from the growth in civil engineering projects both at home and
abroad. The policy covers physical damage arising from a wide range of perils, and public
liability risks for the construction and erection and the maintenance period.

On any large construction site there will be a number of different contractors who should have
insurance cover for their own employees, their own equipment and to cover their liabilities to
both the public and their fellow contractors, employees and equipment.

C10 Package policies

A company requiring different types of insurance may want to purchase the cover combined
into a single package policy. A typical package policy consists of a number of sections, covering
property damage, liability and personal accident.

C11 Catastrophic property losses

It can be difficult for clients to buy insurance cover at an affordable premium for some property
risks. This may be because the losses are potentially so large that even the largest insurers could
be ruined if they occurred, or because losses are so frequent that their occurrence is almost a
certainty. Examples of property damage perils that can be difficult to insure against in some
countries and regions of the world include terrorism, flood and nuclear risks.

In these circumstances, the insurance industry sometimes works collectively with national
governments to arrive at a solution. This may entail insurers participating in a pool, whereby
they all assume a part of the risk, thus spreading it widely round the market. A national
government may provide financial backing, effectively acting as the insurer ‘of last resort.’

Examples of pools are those covering nuclear risks, terrorism (e.g. in the UK, USA, and
Australia) and certain types of natural catastrophe in areas felt to be particularly vulnerable to
losses (e.g. Federal and State flood programmes in the US states, dams and barrages pool in
Switzerland). Insurers in the London market may be asked to underwrite a share of pool risks,
or to reinsure a pool underwriter.

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D Liability insurance
Liability insurance protects the insured in respect of their legal liability to others.

Legal liabilities arise in a number of different ways, for example, through negligence, breach of
contract or breach of statutory duty. The consequences for a person or firm can be expensive,
possibly requiring payments of damages to the injured party and the incurring of expensive
legal costs.

In many countries people carrying out specified tasks or in particular occupations are legally
obliged to take out specified liability insurance.

D1 Public liability (third party) insurance

A public liability policy provides an indemnity to the insured against legal liability for damages
paid to claimants for bodily injury or disease (fatal or non-fatal) or damage to property. The
policy covers both the claimant’s and the insured’s costs and expenses.

D2 Employers’ liability and workers’ compensation insurance

Employers’ liability insurance (EL insurance) covers employers against the costs of
compensation and legal fees for employees who are injured or made ill at work, when the
employer is legally responsible.

In the UK, employers are legally required to take out at least £5m of EL insurance from an
authorised insurer. The insurer provides the insured with a Certificate of Employers’ Liability
Insurance, which the insured must display where employees can easily read it, to demonstrate
that the insured is complying with the law. The legal requirements concerning EL insurance
mean that, for example, an insurer cannot impose conditions making the employer or the
employee responsible for paying any part of the claim.

What this means in practice is that insurers cannot refuse to pay out on a claim if there has been
a breach of warranty by the insured but can claim back against the insured afterwards.

Workers’ compensation (WC) insurance is provided outside the UK. A WC insurance policy
provides medical, rehabilitation and financial benefits for the death or disability to employees
as a matter of right, without regard to fault. This is in contrast with the position under UK law,
where a claimant must show that an employer is legally liable due to their negligence or breach
of statutory duty.

WC insurance is compulsory in a number of countries with ‘no-fault’ systems of compensation.

In the USA, for example, it is compulsory in all states, although the detailed requirements vary.
Benefits in the event of death or disability are payable in accordance with a pre-set scale.

D3 Products liability insurance

A products liability insurance policy covers legal liability for bodily injury or property damage
which arises out of goods or products (including food and drink) manufactured, constructed,
altered, repaired, serviced, treated, sold, supplied or distributed by the insured.

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D4 Professional indemnity insurance

All professional advisers and professional persons owe a duty of care to clients. It has become
commonplace for clients to seek compensation in the courts for loss, on the grounds of failure

Chapter 2
to exercise reasonable skill or care.

A professional indemnity (PI) insurance policy covers liability for professional negligence
causing financial or personal injury to clients. Particular policies are available for particular
professions, including accountants, chemists, solicitors and stock brokers. In many countries
specified professions are legally obliged to have PI insurance. In the UK, for example, this
applies to solicitors and FSA-regulated insurance intermediaries.

Professional indemnity insurance is sometimes called ‘errors and omissions insurance’.

D5 Directors’ and officers’ (D&O) liability insurance

D&O insurance is a means by which a company can recover its costs, and possibly the resulting
damages, in the defence of actions brought against it and/or its past and present directors and
officers (including individuals acting in that capacity) for the commitment of ‘wrongful’ acts (as
opposed to ‘negligent’ or ‘fraudulent’ acts).

The cover allows the directors to claim themselves, but can be extended to allow the employer to
indemnify the directors or even to be the subject of the action itself. Such actions may include
employment practice violations, securities law violations and related civil actions for damages,
but will not usually extend to include criminal fines, taxes and punitive damages.

E Insurances of the person

Insurances of the person provide cover in the event of the death of a person, or accidental injury
or illness to them. Examples include personal accident (PA - may include permanent and/or
temporary total disablement), sports PA, life assurance.

E1 Personal accident insurance

The policy pays compensation for death or injury by accident only, not illness. Normally,
the maximum capital sum is paid for death with a sliding scale of benefits for permanent or
temporary disablement.

E2 Accident and illness insurance

The policy cover is as for the accident policy. In addition, however, lump sums are payable for
permanent total loss of sight of both eyes, for example, and permanent total disablement by
illness of any kind.

London market insurers underwrite many group accident and health schemes. Coverage may
also be given for key employees.

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 Lloyd’s and London Market Introductory Test

E3 Life assurance
Provision of life assurance is a huge global industry, most of which is purchased as a form of
investment. This type of life insurance is not written in the London market, although some
London market companies also operate in the life assurance industry. However, a small number
of specialist life syndicates at Lloyd’s write term life assurance up to a maximum term of 25
years. The sum assured is payable on death if it occurs within the policy term.

Businesses may purchase key person cover (which protects a company against significant
financial loss or closure of business resulting from the death of key personnel), group life cover,
share purchase and partnership assurance (where the sum assured payable on death or in any
given year is structured to comply with the share purchase or partnership facilities).

Personal protection risks include standard term assurance, loan protection and provision for
inheritance tax.

F Motor insurance
In many countries, motor insurance makes up a large part of the total non-life insurance
market, and is nearly all written by large local insurance companies. The London market,
therefore, has only a limited participation in motor business, mainly via the reinsurance of these
‘direct’ motor insurers, and some specialist motor syndicates at Lloyd’s that write direct motor
insurance in the UK and elsewhere. There are also some non-motor syndicates that write motor
insurance outside the UK.

It is compulsory in many countries for the driver of a vehicle to be covered by liability

insurance. In the UK, the Road Traffic Acts 1988 and 1991 require a motorist to have insurance
covering his or her legal liability to pay damages arising out of injury caused to any person
and damage to third party property. A motor policy is currently required to provide unlimited
indemnity for personal injury claims and up to £25M for property damage claims.

F1 Classes of motor insurance risk

Insurers may insure the following classes of risk:

• Private cars: may be insured for private and business purposes, other than the carriage of
passengers for hire or reward.
• Motor cycles: includes any kind of cycle propelled mechanically and includes mopeds.
• Commercial vehicles; includes goods carrying vehicles, hire cars, taxis, coaches, buses,
agricultural and forestry vehicles and special vehicles such as fork-lift trucks and mobile
plant and excavators. Many commercial motor risks are accepted and rated on a fleet basis.
• Motor trade risks: covers motor trade risks, including vehicles used by or in the care,
custody and control of motor traders. Policies may also cover the internal or premises
risks of the motor trader. Cover for the motor trader is not limited to specified vehicles or
specified drivers, as motor traders require cover for vehicles passing through their hands in
the course of their trade.

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 2: Classes of business

F2 Motor policies
Motor insurance policies provide different types of cover. The more cover provided, the more
expensive the policy. The following classification is based on practice in the UK market. Other

Chapter 2
countries have similar classifications, although terminology may differ.

• Third party only: covers liability for death or bodily injury to a third party and liability
for damage to third party property. This is the minimum required by law under the Road
Traffic Acts.
• Third party fire and theft: covers third party liability, plus the risks of loss of or damage to
the vehicle due to fire or theft.
• Comprehensive: the widest form of cover. Covers third party liability, loss of or damage to
the vehicle due to specified perils (including accidental damage) and loss of rugs, clothing
and personal effects. Policies normally provide medical and personal accident benefits as
well. The cover on the vehicle for accidental damage is likely to be subject to an excess,
premium discounts being available if the insured chooses a larger excess.

F3 Certificates of insurance
In the UK, the Road Traffic Acts require every insured with a motor insurance policy providing
compulsory liability cover to be issued with a certificate of insurance, evidencing the existence
of the cover. The policy is of no effect in satisfying the provisions of the Act concerning not
driving without basic third party insurance unless and until the insurer delivers this to the
person taking out the policy.

G Other insurances
The London market writes a range of other types of insurance, not easily classified under the
foregoing headings. In many cases the London market is the leading source of the coverage for
risks worldwide, reflecting its specialist and entrepreneurial approach to business.

G1 Political risks insurance

‘Political risks’ is used to describe a variety of types of insurance coverage. The common theme
is that a political risk policy offers protection to businesses trading internationally against the
risk of financial losses resulting from a foreign government interfering with investments or
contracts, or the non-performance of a contract by contracting party. This coverage is essential
in many aspects of international trade.

G1A Contract frustration insurance

This provides cover against costs suffered when a contract is unilaterally terminated by a foreign
government or frustrated due to political perils including war, embargo or licence cancellation.

G1B Confiscation, expropriation, nationalisation, deprivation (CEND) insurance

This provides cover against loss of assets or investments arising out of the actions of a foreign
government. Policies may cover fixed assets, such as plant and equipment, or mobile assets such as
aircraft (which may be prevented from taking off and leaving a country: this happened when Iraq
invaded Kuwait in 1990). Policies may also cover the loss of contractual rights such as exploration
rights or mineral concessions, and forced abandonment of assets arising out of war or civil unrest.

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 Lloyd’s and London Market Introductory Test

G1C Political violence insurance

This provides cover against physical damage to assets due to war, civil war, strikes, riots, civil
commotion, sabotage, terrorism and malicious damage.

G1D Political risks for lenders

Financial institutions lend considerable amounts to parties in foreign countries and they need
protection against the possibility that the borrower defaults on it’s (re)payment obligations due
to political risks, political violence risks and currency inconvertibility/non-transfer.

G2 Credit insurance
Credit insurance typically provides cover to a lender against the default or insolvency of the
contracting counter party. Credit policies are often for more than one year, and are subject to a
credit analysis being carried out by underwriters.

G3 Intellectual property insurance

Intellectual property insurance protects the patents, copyrights, trade and service marks of
industry, businesses and creative artists. It covers the policyholder against the legal costs of
pursuing infringements, i.e. well known designer brands taking action against fake goods
importers and sellers.

G4 Contingency insurance
The essence of insurance is that it protects against the consequences of a purely fortuitous
event outside the insured’s control. As we have seen, the London market provides a variety of
mainstream products, for example, covering loss of or damage to property or the consequences
of an accident or event for which someone is held to be legally liable.

There are a number of other circumstances where an organisation or business has a financial
interest, which is insurable, connected to an event taking place, or in some instances not
taking place. These events are termed ‘contingencies’ and although they do not directly impact
a business’s physical assets, they can have significant financial consequences, which can be
managed and mitigated by the purchase of specialist insurance cover. Some of the main types of
contingency risk are set out below.

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G4A Cancellation and abandonment

Organisers, sponsors and broadcasters are all interested in the successful running of public
events where the cancellation of such events would lose ticket sales and revenue. TV companies

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may also lose revenue (e.g. advertising revenue) if a broadcast has to be cancelled and does not
attract a large audience. The types of event covered include:

• sporting fixtures, events and tournaments, such as the FIFA World Cup or the Olympic
Games;
• concerts and concert tours (pop concerts, orchestral concerts) and theatrical performances;
• exhibitions, conferences and conventions;
• film shoots.

The cover provided is, typically, against any cause beyond the control of the assured and the
participants, such as poor weather at a summer sporting event or preventing a film being
completed on time. Misjudgment of the market for, or popularity of, an event so that not
enough tickets are sold is not covered – this is a pure economic risk and not insurable.

G4B Non-appearance
This is similar to or an extension of cancellation and abandonment. It focuses on protecting
concert promoters and other interested parties against the non-appearance of a key performer
or artiste through personal accident, sickness or death, or other unforeseen eventuality. It covers
not just the loss of revenues due to non-appearance but also the extra expense involved in
rescheduling or mitigating loss. Cover can be purchased relating to sports personalities, singers,
musicians, conductors, speakers and performers.

Insurers require a declaration of good health for the Insured person(s) at the outset of the
insured period.

G4C Products recall

Brand image is one of the most valuable assets a business possesses, and the likelihood is that
considerable time and money has been invested to build a good reputation with customers.
Products recall delivers insurance protection against the financial costs of recalling products,
and professional crisis management consultancy. The type of contingency that a products recall
policy responds to are malicious contamination by third parties, accidental contamination and
extortion. It is commonly purchased by producers and distributors of food and drink.

G4D Over-redemption insurance

The promotion of products and services by means of special offers, coupons, prizes and other
similar gifts is common across all areas of consumer-facing business. Sometimes, what appears
to be a simple and effective way to reach consumers can go wrong. A good example of this was
the free flights offer that Hoover made a number of years ago, which was far more popular than
had ever been imagined. Over-redemption insurance protects clients when a promotion is more
successful than planned. The cost of a promotion will be based on the expected consumer take-
up rate of the special prize or offer. Such acceptances may be difficult to predict accurately, and
an over-redemption insurance policy functions like a stop loss policy to protect a budget.

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 Lloyd’s and London Market Introductory Test

G4E Prize indemnity/promotional insurance

Prize indemnity insurance is often bought by major sports clubs, promoters or sponsors to
protect their financial position in the event that a player or team succeeds in a tournament or
event and, thus, wins a prize. Sports fans will be aware of one-off prizes, say, for a 147-break in
a snooker tournament or a car being given as a prize for a hole in one at a golf championship.
Players and teams can also pick up considerable bonuses for advancing through various stages
of and winning a competition such as the FIFA world cup, or for achieving promotion from
their current league to the one above.

The availability of this insurance enables sports managers, organisers and promoters to offer
valuable prizes and bonuses and insure the risk for a fraction of the potential payout.

This insurance is essentially against the cost of something positive happening, based on the
competitive spirit and desire to win. Insurance against failing (such as being relegated) is not
available, since this would provide a guarantee of compensation and remove the incentive to win.

G5 Livestock insurance
This covers the insured against death of animals as a result of accident, illness or disease.

Cover is also available for stud animals and breeding stock for risks such as non-performance,
infertility or offspring with physical defects. Farm animals are also insured for mortality and
other perils.

Summary
In this chapter we have examined the main classes of business transacted in the London market.
It should be noted that the various covers we have looked at probably contain exclusions which
we have not detailed.

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Glossary of terms

Chapter 2
Actual total loss There is an actual total loss where the subject matter of insurance i.e. the subject
matter insured is completely destroyed, or so damaged as to cease to be the subject
matter insured, or where the insured is irretrievably deprived of it.
Clauses • Sections of a policy or other legal document.
• In marine insurance, sets of detailed provisions inserted for particular types of risk.
Constructive total In marine insurance a constructive total loss occurs where the subject matter of
loss insurance is reasonably abandoned by the insured on account of its actual total loss
appearing unavoidable or because it could not be preserved from actual total loss
without expenditure that would exceed its value after the expense had been incurred.
Deductible An amount or percentage, specified in a policy, which is borne by the insured and
will be deducted from the total amount of the claim made.
Excess The first portion of a loss, being an agreed percentage or fixed sum, which the
insured agrees to bear or a portion another insurer is bearing. The policy limits
should be paid in full above an excess, as contrasted to a deductible which will be
deducted from a policy limit.
Exclusion A provision in a policy that excludes the insurer’s liability in certain circumstances or
for specified types of loss.
General average In maritime law when, in a maritime adventure, a sacrifice has to be made or an
(loss) expense incurred in time of peril in order to preserve the adventure, the loss or
expense is shared among the interests involved in the venture in proportion to the
value of each interest. Such a loss is known as a general average loss.
Liability insurance Insurance to cover the legal liability of the insured to the extent of such liability but
subject to any limitations expressed in the policy.
Long-tail A term used to describe a risk that may have claims notified or settled long after
the policy has expired. It is often necessary for an insurer to arrange reinsurance
protection to cover claims which may arise after the account has been closed. A term
used to describe risk covered as those of liability rather than physical damage.
Negligence The omission to do something which a reasonable person, guided by those
considerations which ordinarily regulate the conduct of human affairs, would do; or
doing something which a prudent and reasonable person would not do.
Particular average Partial loss or damage to the subject matter insured, caused by a peril insured
(loss) against, not being a general average loss.
Peril A contingency, or fortuitous happening, which may be covered or excluded by a
policy of insurance.
Pro rata condition A non-marine policy condition providing that, in the event of under-insurance, any
of average claim shall be scaled down in proportion to the degree of under-insurance.
Short-tail A term used to describe a risk in respect of which all claims are likely to be advised
and settled within the period of cover or shortly after the cover has expired. Normally
confined to physical damage risks.

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 Lloyd’s and London Market Introductory Test

Sue and labour Sums reimbursable to an insured under a marine insurance policy where the insured
(charges) has incurred reasonable expense in seeking to avert or minimise a loss to property
which would have been covered by the policy had the loss occurred.
Third party liability Liability incurred by the insured to another party under common or statute law.
Wear and tear This is the amount deducted from claims payments to allow for any depreciation in
the property insured which is caused by its usage.

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