Insurance and the Division of Risk

15.1 What Should Be Insured and What Should Be Retained

Not every risk should be transferred. Insurance costs money, and a House that insured every small uncertainty would give away much of its profit.

The question is which losses the House can comfortably absorb and which losses would materially weaken it.

Insure what could injure the House: A cargo representing a large part of available capital deserves stronger protection than a small shipment whose total loss would be unpleasant but easily survived.

Retain ordinary small losses: Minor breakage, normal leakage, ordinary shrinkage, and small recurring damage may be cheaper to bear than to insure repeatedly.

Insurance is most valuable against losses that are infrequent but severe.

Consider concentration: Ten individually modest cargoes aboard one vessel may together create one large risk. Several shipments sailing through the same dangerous waters at the same time may also be more concentrated than the books suggest.

Count risk by event, not merely by invoice.

Consider the condition of the House: A prosperous, liquid House may retain more risk than one already facing heavy debts and maturities.

The same cargo can therefore deserve insurance in one year and partial retention in another.

Do not insure only because custom does: Compare the premium with the probable loss and the House’s ability to bear it. Likewise, do not refuse insurance merely because several previous voyages were safe.

Past calm seas do not reduce the violence of the next storm.

Partial insurance: Sometimes it is sensible to insure only part of the value and retain the remainder. This limits premium expenses while protecting the House from catastrophic loss.

But do not retain so much merely to save premium that a single disaster threatens solvency.

15.2 Marine Insurance Contracts and Premiums

Marine insurance is an agreement under which underwriters accept specified maritime risks in return for a premium.

The policy (polizza di assicurazione) should state clearly what property is covered, for what value, on which voyage, aboard which vessel where relevant, and against which risks.

Translator note: Italian merchants had used marine insurance for centuries by 1600. The polizza di assicurazione recorded the insured interest, voyage, amount, premium, and conditions under which underwriters would answer for loss.

Premium: The premium (premio) is the price of transferring risk. It should rise when danger rises.

A winter voyage, an old vessel, a dangerous route, wartime conditions, piracy, or uncertain destination may all increase the price.

Do not complain merely because premiums become expensive. Ask what the increased price is telling us.

Underwriters risking their own money may possess information worth hearing.

Define the voyage: State the point at which cover begins and ends. If goods travel by cart, lighter, ship, and warehouse, determine which portions of the journey are included.

Define the property: Describe the cargo sufficiently. Oil, silk, grain, bullion, and fragile goods create different risks.

Insured value: Avoid both careless underinsurance and unjustified overvaluation. If the cargo is worth substantially more than the amount insured, the House still retains the difference. If the declared value is exaggerated, disputes and suspicion follow.

Know exclusions: Insurance does not necessarily answer for every deterioration. Damage caused by poor packing, inherent spoilage, ordinary shrinkage, or prohibited conduct may fall outside protection depending upon the agreement.

Read the policy before the ship sails.

Several underwriters: Large risks may be divided among several insurers, each taking a portion.

This prevents one man from bearing more than he wishes and prevents the House from depending entirely upon one payer.

15.3 Selecting Underwriters Who Can Actually Pay

A cheap policy written by an insolvent man is expensive paper.

The House must judge insurers as carefully as debtors.

Reputation: Ask who pays claims promptly, who disputes everything, who has honored large losses, and whose obligations already appear excessive.

Capital: An underwriter may appear wealthy but have accepted risks far beyond his means. Try to understand not only what he owns but how much he has promised to others.

Concentration: Several underwriters may seem to diversify the risk while all are exposed to the same fleet, route, or political event.

If five insurers all suffer from the same naval disaster, our policy may be divided among names but not among independent fortunes.

Do not choose only by premium: One underwriter charging slightly more but known for prompt settlement may be preferable to another offering a low rate and endless resistance after loss.

The purpose of insurance is not to purchase the cheapest promise. It is to purchase reliable protection.

Maintain relationships: Underwriters who know the House’s honesty and quality of information may offer better terms and settle claims more efficiently.

Reputation therefore reduces insurance cost just as it reduces borrowing cost.

Watch changing strength: An insurer safe last year may be weak after several losses. Review major counterparties continuously.

Insurance transfers maritime risk into credit risk against the insurer. Never forget the exchange.

15.4 Declaring Cargo, Routes, Ships, and Circumstances Honestly

Insurance depends upon information. If we ask another man to price a danger while concealing facts that materially increase it, the agreement becomes doubtful before the voyage begins.

Describe the cargo honestly: State what is being carried where the nature of the goods matters.

Identify the vessel: If the policy depends upon a named vessel, do not substitute another secretly because the original ship became unavailable.

Disclose the route: A direct voyage differs from one calling at dangerous or hostile ports. If the vessel is expected to deviate materially, the underwriter should know where the agreement requires it.

Known circumstances: If we know that war has begun, pirates were recently sighted, the vessel suffered damage, or the destination is threatened with closure, do not seek ordinary terms while concealing the information.

A short-term saving gained by silence can destroy the entire claim later.

Do not insure after learning the loss: News travels unevenly. A merchant may sometimes learn that a ship is endangered before an underwriter does.

To seek insurance after privately learning that the loss has already occurred or is effectively certain is not prudent commerce. It is deception.

Require honesty from agents: A broker arranging insurance for us must not conceal material facts merely to obtain a lower premium.

The broker’s misconduct will become our difficulty when the claim is disputed.

Keep records: Preserve correspondence showing what was declared, when the policy was made, what instructions were given, and what information was known at the time.

Good records protect honest merchants because they prove honesty after memories differ.

15.5 Claims, Abandonment, Disputes, and the Danger of Concentrated Loss

The value of insurance is tested after misfortune.

At that moment, act quickly and preserve evidence.

Notice: Inform underwriters promptly when significant loss is reported. State what is known and distinguish confirmed facts from rumor.

Evidence: Preserve the policy, invoice, bill of lading, correspondence, master’s protest, surveys, receipts for salvage expenses, and records of damaged goods.

A claim assembled from memory months later will be weaker than one supported by documents created during the voyage.

Mitigate the loss: Insurance does not give the House permission to neglect damaged property. Recover goods where economical, protect them from further deterioration, and sell damaged merchandise when delay would reduce value.

The insurer should answer for insured loss, not for additional waste caused by our indifference.

Abandonment: In severe cases the insured may seek to abandon the insured interest to the underwriters and claim according to the policy and applicable practice.

Such decisions require care. Do not abandon valuable property merely because recovery is inconvenient, nor dispose of it carelessly before understanding how the action affects insurance rights.

Translator note: Maritime abbandono, or abandonment, could allow an insured party in qualifying circumstances to surrender rights in the damaged or endangered property to insurers and pursue recovery as a total loss. The precise conditions depended upon policy wording, law, and local practice.

Disputes: Claims may be contested over seaworthiness, deviation, undeclared circumstances, valuation, excluded losses, or whether damage resulted from an insured peril.

Negotiate firmly, but do not manufacture claims. A House known for exaggerating losses will eventually pay more for insurance or find good underwriters unwilling to deal with it.

General average: Insurance should be coordinated with obligations arising from the general average. A cargo may arrive safely yet still owe a contribution because other property was sacrificed for the common safety.

Concentrated loss: The greatest danger is often several losses arriving together.

A war may cause ships to be captured, insurers to fail, debtors to delay, exchanges to move adversely, and governments to seize goods at the same time.

Risks appearing separate in peaceful years may reveal themselves as one risk during a crisis.

Therefore diversify not merely by cargo but by vessel, route, insurer, market, and political exposure.

My son’s insurance is not a substitute for judgment.

Choose good vessels. Choose good masters. Pack carefully. Avoid foolish routes. Divide cargoes when concentration is excessive. Then insure what remains too dangerous for the House to bear alone.

Pay a fair premium for reliable protection. Select underwriters whose promises are supported by sufficient fortunes. Tell them truthfully what they are being asked to insure.

When loss occurs, preserve evidence, reduce further damage, and pursue the claim honestly and firmly.

Above all, remember that insurance does not destroy risk.

It moves risk from one balance sheet to another.

Make certain the man receiving it is strong enough to carry it.