http://www.nottingham.ac.uk/law/TEXTHNB.HTM Marine Insurance & War Risks Howard N. Bennett, Lecturer in Law, University of Nottingham. Paper delivered to the Nottingham University Centre for International Defence Law Studies, May 26, 1993. Copyright reserved. I. THE HISTORY & STRUCTURE OF WAR RISKS COVER Understanding the structure of modern war risks cover may be assisted by an appreciation of the history of the London insurance market, a market which owes its most famous name and much of its shape to the consumption of coffee. *** In 1711, faced with serious National Debt problems, the government established a company, the South Sea Company, to exploit a trading monopoly conferred by charter in return for taking over #156;9 million of the debt. Holders of government securities could exchange them for shares in the company, which would receive reduced interest from the Treasury. The shareholders would, however, benefit from an assuredly and increasingly profitable investment in the South Sea Company. The flaw was that the company's trading monopolies in reality were of little if any value, consisting of dealings in inwrought iron with Spanish subjects, some vague fishing rights and trade with Spanish South America, trade which never blossomed. By way of comparison, one commentator has postulated a company floated in London in 1943 "to develop British trade with Japan, to buy and sell base metals with Germany, and to run a fleet of trawlers to Iceland". Between 1711 and 1720, when the company took over another œ31 million of the National Debt, every speculator's trick was employed to maintain the apparent buoyancy of South Sea Company stock. By hook and principally by crook, its œ100 stock rose to a height of œ1000. But the government sponsored gambling on South Sea stock spread: A perfect rage for speculation seized the entire country: fraudulent companies of every conceivable description were floated, and however absurd their ostensible purpose, they found people willing to invest in them ... The crowning imposition of all ... was a scheme "for carrying on an undertaking of great advantage, but nobody to know what it is." The ingenious deviser of this idea asked for a capital of half a million, and provided that every investor paying down two guineas per cent was to have œ100 per annum for every œ100 so subscribed. Extravagant as this sounds, the projector received 1000 subscriptions in a single morning, and decamped with his 2000 guineas in the afternoon. The nominal value of all these "Bubbles" as they were called, was œ500,000,000 - about twice the value of all the land in England. The bubble of deceit was pricked in 1720. The incorporated company was the key to stock amenable to speculation and, at the time, incorporation was by Royal Charter or by Act of Parliament. As the success of a petition for a charter was dependant primarily upon the success of extensive tactical bribery, a number of companies resorted instead to purchasing obsolete charters from firms which had ceased trading. Although charters granted the right to pursue a particular trade, such restrictions were then cavalierly ignored. However, in March 1720, a House of Commons committee met to investigate fraudulent schemes for the subscription of capital including the acquisition of obsolete charters. The result of its report was the preparation and passing in June 1720 of the Bubble Act, which, inter alia, rendered illegal the raising of public subscriptions either in the absence of authority of charter or Act of Parliament or under an obsolete charter. The institution of proceedings against companies with a view to forfeiture of their obsolete charters, combined with the adverse publicity engendered by the passing of the Bubble Act, triggered a stock market crash of unprecedented devastation in September 1720. In the course of that month, shares in the South Sea Company itself fell from 780 to 180 per cent. Although the company was too entwined with the nation's finances to be permitted to fail totally, it never regained public confidence. It "dragged out a struggling existence till 1807; and the faded splendours of its South Sea House survived long enough to secure immortality in the Essays of Elia". Throughout the eighteenth century and beyond "the shadow of 1720 retarded the development of incorporated companies". New charters and authorising Acts of Parliament for any type of company were few and far between. But the Bubble Act itself had a more direct impact upon the evolution of the marine insurance industry. At the time of preparation of the Act, charters were being sought for a new marine insurance corporation and for an underwriting company operating under the purchased obsolete Elizabethan charters of the combined Mines Royal and Mineral and Battery Works. The petitions to Parliament for charters proving unavailing, the promoters appealed unto Caesar, "or rather (to be more accurate) they offered Caesar a bribe and Caesar accepted it". An impecunious government had fallen into arrears of œ600,000 on the Civil List. The Prime Minister, Robert Walpole, engineered a scheme whereby the promoters of each of the petitions would pay the Government œ300,000 for the award of charters granting exclusive rights to corporate marine underwriting. The ensuing support of the King, George I, led to the grant of exclusive charters to the Royal Exchange Assurance and the London Assurance, the relevant provisions being included in the Bubble Act. Permission for two charters was granted by s. 1, each of the beneficiaries being required by s. 2 to pay œ300,000 "into the Receipt of the Exchequer ... for the Use of the King's Majesty, in order to discharge the Debts and Expenses of his Civil Government". The crucial provision, however, was s. 12 which prohibited ... all other Corporations or Bodies Politick, before this time erected or established, or hereafter to be erected or established, whether such Corporations or Bodies Politick, or any of them, be sole or aggregate, and all such Societies and Partnerships as now are, or hereafter shall or may be entered into by any Person or Persons, for assuring Ships or Merchandises at Sea ... from entering into any contract of marine insurance. However, s. 12 also declared that: ... any private Person or Persons shall be at Liberty to write or underwrite any Policies, or engage himself or herself in any Assurances of [marine insurance] as fully and beneficially as if this Act had not been made, so as the same be not upon the Account or Risque of a Corporation or Body Politick, or upon the Account or Risque of Persons acting in a Society or Partnership for that Purpose ... At face value, therefore, the impact of the Bubble Act was threefold. First, individual underwriting via brokers remained unfettered. Secondly, competition was introduced in the form of the Royal Exchange Assurance and the London Assurance. Thirdly, the marine insurance market was closed absolutely except to individual underwriters and the two corporations. The reality, however, was that individual underwriting received an almost total monopoly. The stock market collapse of 1720 led to the corporations defaulting on their œ300,000 statutory debts/bribes. 50% remissions enabled them to survive, but they made little impact on the marine market. They were not competitive; they imposed a limit of œ10,000 on the sum assured; they were reluctant to accept risks attached to voyages between two overseas ports (known as "cross risks") or to cover neutral ships against the war risk of capture in enemy ports; they tended to impose restrictive terms and conditions. Individual underwriters helped themselves to over 90% of the marine market. What, however, led to the marine market adopting Lloyd's as its centre? Edward Lloyd established a maritime connection but not an underwriting tradition. The 1730s and 1740s saw an export boom and a correlative growth in the demand for marine insurance, monopolised, in the wake of the Bubble Act, by individual underwriters. A leading criticism of the marine market prior to 1720 had been its scattered nature. Commercial expedience dictated concentration and Lloyd's became the centre, probably because of the development of the coffee house by its proprietors as a centre for shipping intelligence, exemplified by the establishment in the 1720s of the newspaper Lloyd's List, which has been published continuously ever since and survives today as the Lloyd's List and Shipping Gazette. The Bubble Act had one further consequence. Shipowners dissatisfied with the coverage and premium rates available at Lloyd's came together to constitute unincorporated associations in the form of mutual assurance associations or clubs so as to divide their losses between themselves. Although the Bubble Act corporate duopoly on marine insurance business was repealed by the Marine Insurance Act 1824, and the mid-nineteenth century saw the advent of incorporation by registration and limited liability, both Lloyd's and the associations survived the advent of fresh competition, although it was established in 1875 that associations with more than twenty members were in law companies requiring registration under the Companies Act 1862. Association members do not pay premiums as such. A provisional contribution is required from all association members. At the end of the association year, the management calculates the liabilities for the previous twelve months and makes a supplementary call or gives a refund as appropriate. The association year commences and ends at noon February 20, Greenwich time. The terms of coverage are determined by the association rules, which usually provide, inter alia, for automatic renewal subject to termination by either the member or the association in accordance with the procedure specified in the rules. The evolution of marine war risks coverage. In 1898 a small group of French explorers under the command of Captain Jean Baptiste Marchand planted a French flag in the village of Fashoda in the Sudan, then under the dominion of Great Britain. The resulting diplomatic incident threatened to develop into war between Britain and France until Marchand was ordered to withdraw. The 1890s also saw considerable tension between Britain and the United States. The watching marine underwriters were acutely aware of the power of the navies of both France and the United States and a General Meeting of Lloyd's, held on June 15, 1898, adopted for the first time a formal policy of severing marine and war risks. The agreements concluded in Lloyd's coffee house in the eighteenth century for the assumption of risk in return for payment of a premium developed into a standard form contract, the S.G. Policy. This policy developed on an entirely ad hoc basis. It was "not a planned document and never during the whole of its long life did it acquire this characteristic". As both law and practice developed, risks were amended and exceptions developed. Moreover, a complex way of presenting the cover evolved. Although the S.G. Policy itself spelt out the cover granted in terms of a list of risks and exceptions, the market also developed a series of standard clauses for particular types of risk, e.g. for cargo, hulls or freight, for hulls for a period of time or for a voyage. These more detailed statements of the cover would be appended to the S.G. Policy. However, as both the S.G. Policy and the standard clauses had the force merely of contractual terms, they were open to amendment. Thus a particular risk might be crossed out, or an endorsement slip might be attached to the policy or standard clauses by glue. The result was hardly a model of clarity. As early as 1791, Buller J. remarked that "it is sufficient to say that a policy of assurance has at all times been considered in courts of law as an absurd and incoherent instrument". *** The London market is not, however, the only war risks insurer. Towards the end of the nineteenth century, the incidence of revolutions in South American republics resulted in underwriters requiring enhanced premiums for war risks cover for vessels operating in their waters. Consequently, 1898 saw the first mutual war risks association to provide cover at a lower cost. The Government also has an important involvement stemming from the first World War. In 1903, it appointed a committee under the chairmanship under Austen Chamberlain to consider whether private enterprise could accommodate marine insurance in time of war involving the United Kingdom. The committee concluded that it could, but losses from the Russo-Japanese War, which confirmed the efficacy of the torpedo, and the growing power of the German navy, prompted a considerable retreat from war risks cover by both the London market and the associations. Consequently, in 1913 a second committee chaired by Huth Jackson drew up the scheme adopted by the Government on August 5, 1914. With respect to hulls, the Government offered 80% reinsurance cover, controlling by regulation both premium rates and settlement of claims. As regards cargoes, the Government opened a State Insurance Office offering primary insurance directly to merchants for cargoes in British hulls at a uniform rate for all voyages. The Government, however, did not appropriate to itself any monopoly and permitted the private sector to compete for cargo cover. The effect of the scheme was that the Government ended up covering poor cargo risks, whilst Lloyd's and the companies undercut it with respect to the better risks and made considerable profits. Since the purpose of the scheme was not to enable the Government to participate in the insurance market but to ensure the continuance of certain voyages, the result was not without justification. But it led to abandonment of the uniform rate for cargoes. Overall the Government made a profit of œ32 million on hulls insurance against a œ7.5 million loss on cargo cover. The State Insurance Office covered approximately 27% of the total value of war-time cargoes, while the remaining œ6,000 million went to the private sector. ***
