Classification of Risks in Hull Insurance Based on the Origin of Risks

covers expenses such as general average contribution, salvage and costs of mitigating loss.

ii) Named Perils Insurance: only covers certain perils specifically specified in the hull insurance contract based on the original insurance conditions, such as total loss insurance; partial loss insurance...

iii) Secondary insurance: this type of insurance is often applied to cover risks that are often excluded in the original insurance package, such as war risk and strike insurance.

1.2 Risks and losses in hull insurance

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1.2.1 Risks in hull insurance

Risk is one of the basic concepts of insurance. There are many different concepts of risk, but in general, risk can be defined as accidents, disasters, incidents that occur unexpectedly, randomly or dangerous threats that, when occurring, cause losses to the insured.

The 1990 Vietnam Maritime Code uses “maritime peril” (Article 200) to refer to maritime risks in hull insurance, but does not explain what maritime peril is. The 1992 Maritime Code of the People’s Republic of China uses “insurable peril” and defines it as “any maritime peril agreed upon between the insurer and the insured, including perils occurring in inland waters or on land in connection with a sea voyage” [7; Article 216]. The 1999 Maritime Commercial Code of the Russian Federation [37; Article 246] and the 1995 Maritime Commercial Code of Ukraine [8; Article 239] use the term “perils and incidents” to refer to maritime risks, and do not specify what “perils and incidents” are. Maritime laws of Western countries and the United States both use the concept of “maritime risks”. According to the author, “maritime risk” is appropriate, because it has a broader meaning, covering a

more fully cover accidents, disasters, and unexpected incidents that may cause damage to the insured object, in this case, the ship.

The English Marine Insurance Act 1906 defines marine risks as “those risks which arise out of or in consequence of the navigation of a ship at sea, namely, risks of the sea, fire, risks of war, piracy, theft, arrest, detention and internment of kings, lords, people, jettison, unlawful acts and any other risks, risks of a similar kind or risks which may be expressly provided for by the contract”[6; dd3].

In the 2005 revised Vietnam Maritime Code (effective from January 1, 2006), the concept of maritime risks is mentioned, and defined in the spirit of converting the provisions in the British Marine Insurance Act 1906 as follows: "Maritime risks are risks occurring in connection with a sea voyage, including risks of the sea, fire, explosion, war, piracy, theft, seizure, confinement, detention, jettison, requisition, purchase, illegal acts and similar risks or other risks agreed upon in the insurance contract" (Article 226).

Thus, it can be seen that maritime risks are first of all risks of the sea, risks at sea and risks on shore are clearly stipulated in the marine insurance contract. However, to be insured, maritime risks must be risks that occur in connection with a sea journey.

1.2.1.1 Classification of risks in hull insurance based on the origin of the risk

Based on the origin, marine risks in hull insurance can be divided into:

i) Act of God. These are natural phenomena that humans cannot control such as storms, tornadoes, lightning, bad weather, tsunamis, earthquakes, volcanic eruptions, etc.;

ii) Perils of the Sea are accidents that happen to ships at sea, such as ships running aground, sinking, exploding, colliding, hitting reefs, hitting other objects, and going missing. These risks are called major risks;

iii) Other unexpected accidents are damages caused by random external impacts that are not included in the above mentioned marine disasters. Unexpected accidents can occur at sea, on land, in the air, during transportation... These are called secondary risks;

iv) Risks caused by political and social phenomena or by the insured's fault such as war risks, strike risks and terrorist acts caused by terrorists;

v) Risks due to the special nature or characteristics of the subject matter insured or damages directly caused by delay.

1.2.1.2 Classification of risks in hull insurance based on insurance business

Based on the insurance business, risks in hull insurance can be divided into three main types as follows:

i) Common insured risks are risks that are normally insured under the original insurance conditions. These are risks that are unexpected, random, and occur beyond the insured's control, such as natural disasters, marine disasters, other unexpected accidents, including both main and secondary risks such as stranding, sinking, collision, fire, etc.;

ii) Uninsured risks, also known as excluded risks, are risks that are not accepted by the insurer or are not compensated by the insurer in any case. These are risks that naturally occur, are certain to occur, due to the intentional fault of the insured, and the damage is directly caused by the insured.

Next is delay, catastrophic risks whose scale, extent and consequences cannot be foreseen by humans;

iii) Separately insured risks are risks that require separate agreements to be insured. These risks include war, strikes, and terrorism.

In hull insurance, risks usually have the following characteristics:

- the causes of risk are very diverse;

- the damage caused by insured risks is often very large, sometimes catastrophic (the damage caused by the total loss of a medium-sized ship is equivalent to the damage caused by the total loss of 500-1,000 cars);

- there can be no reliable assessment of the likelihood of a risk occurring, in other words losses in hull insurance are virtually unpredictable.

Thus, maritime risks are risks that occur in connection with the sea voyage, including risks of the sea, fire, explosion, war, piracy, theft, seizure, confinement, detention, jettison, requisition, purchase, illegal acts and similar risks or other risks agreed in the insurance contract. Maritime risks have diverse causes, often cause very large losses and are almost impossible to assess.

1.2.2 Loss in hull insurance

Losses are the damage, loss of the ship caused by risk. If risk is a threat, is the cause of loss, then loss is what has already happened and is the consequence of risk.

Loss is an important concept in hull insurance, which is the basis for compensation under the insurance contract. However, the insurer only compensates for losses that are a direct consequence of the insured marine risks.

Hull insurance losses are often large, sometimes catastrophic.

1.2.2.1 Classification of losses in hull insurance based on compensation capacity

Based on the ability to compensate, losses in hull insurance can be divided into:

i) Losses include: losses caused by insured risks for which the insurer must compensate the insured.

ii) Excluded losses: are losses occurring due to:

- uninsured risks;

- insured risks that occur due to intentional wrongful acts of the insured;

- delay caused, even if the delay is caused by an insured risk;

- ordinary wear and tear due to normal running and breakage, blemish or nature of the vessel.

1.2.2.2 Classification of losses in hull insurance based on level

Based on the level, loss in hull insurance can be divided into

wall:

i) Partial loss: Partial loss is when the ship is damaged,

partial loss, damage, or reduction in value of the vessel. For partial loss, the insured shall bear the deductible depending on the type of risk, the deductible shall be applied as agreed by the parties.

Component losses usually occur due to the following main causes: collision with wharf or other equipment at the port; bottoming; hull and shaft hitting ice; carelessness when transferring cargo; improper use of equipment and machinery on board.

In hull insurance, partial losses occur more frequently and the total partial loss of a ship is often two to three times higher than the total total loss of a ship, at around $1 billion/year [36; 36].

ii) Total loss: there are two types:

- Constructive total loss: is the case where the ship is damaged by an accident and cannot be repaired or the cost of repair and restoration is ineffective; and

- actual total loss: is when the ship is hijacked or goes missing, sinks...

According to statistics from the Liverpool Insurers Association, the main causes of total ship losses are natural disasters; fire and explosion; floods; stranding; damage to engines, shafts, propellers; and disappearance.

The damage in the case of total loss of a medium-sized ship is usually around 7-12 million USD, for large-sized oil tankers, the damage can be up to 50-60 million USD. For Vietnamese ships, the total loss of a ship is usually around 2-3 million USD. On average, the world fleet is destroyed about 16 to 26 ships per month. Every year, the world fleet suffers total loss of hundreds of ships, with a total tonnage of more than 1.5 million tons, estimated at about 400,000 USD. In 1976, the total value of damage due to ship loss was about 440 million USD [41;34]. From 1987 to 1994, there were 128 cases of actual and estimated total loss of ships in the world, not including small ships with a tonnage of no more than 500 tons.

The history of world maritime has not forgotten the huge losses caused by total loss of ships such as: the sinking of the Titanic, until now people still cannot calculate the exact damage; the collision of the two ships Venoyl and Venlet, causing damage of 30 million USD; the sinking of the oil tanker Olimpic Bravery, causing damage of 30 million USD;

$50 million damage; the Munhen cargo ship accident, total cargo damage up to $70 million.

Recently, in Vietnam, within less than half a month, two large Vietnamese ships sank at sea. On May 1, 2005, the Sea Bee ship sank off the coast of Shanghai, China. Twelve days later, the Mimosa ship was hit by a foreign ship and sank about 130 nautical miles off the coast of Vung Tau. According to insurers, the insurance amount for these losses will be very large (about 2 million USD/ship). Annually, the total loss compensation amount of Vietnamese insurance companies accounts for about 50% of hull insurance premium revenue 4 .

1.2.2.3 Classification of losses in hull insurance based on the nature of the loss

Based on the nature of the loss, it can be divided into:

i) Particular average: is the damage or loss of a ship caused by natural disasters or unexpected accidents. Particular average can be a total loss or a partial loss.

ii) General average: is a special type of risk found only in marine insurance.

General average is a concept that has existed for a long time in the maritime industry, before marine insurance and existed independently of marine insurance. However, recently almost any hull insurance includes general average as a special risk.

General average is any extraordinary sacrifice or expenditure intentionally and reasonably incurred for the purpose of saving the ship, cargo and freight from a common and actual peril.

4 Source: Bao Viet

general average, there must be a general average act. A general average act exists when and only when there is an extraordinary sacrifice or expenditure intentionally and reasonably made or incurred for the common safety for the purpose of preserving from peril the property involved in the common maritime adventure.

The general average act must be the voluntary and intentional act of the master and crew; the sacrifices and expenses must be extraordinary and extraordinary; the sacrifices and expenses must be reasonable and for the common safety of all interested in the adventure; the peril must be really serious; the loss, damage or expense must be a direct consequence of the general average act; and the general average act must occur at sea.

General average includes general aerage sacrifices and general average expenditure. General average sacrifices are damages or expenses that are the direct consequence of a general average act. For example: A ship encounters a big storm and is forced to dump cargo of cargo owner A into the sea to save the entire journey. Cargo A being dumped into the sea is a general average sacrifice. General average expenses are the costs paid to a third party for saving the ship, cargo, escape fees or costs to make the ship continue its journey. General average expenses include: salvage costs; costs to refloat a ship when stranded, costs towing, towing, and towing a ship in distress; costs at a port of refuge such as costs to unload cargo, fuel for general safety or for temporary repairs.

General average shall be apportioned in proportion to the value of the ship, cargo, freight, and passenger transport charges at the place and time the ship takes refuge after the occurrence of the general average. Losses which are the direct consequence of the act causing the general average shall be included in the general average, special expenses exceeding the necessary level shall only be included in the general average within reasonable limits for each specific case. The insurer

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