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Odds on the Sea
by Tay Vaughan
Warren Taylor Vaughan III, Western Regional Director of the Oceanic Society and marine surveyor, recently traveled 10,000 nautical miles in a sailing vessel he built himself He is a member of the Society of Naval Architects and Marine Engineers.
While gambling has been claimed to be the oldest known sport, Marine insurance is recognized as the oldest form of indemnity of which there is any record. In many ways they are similar. As long ago as 900 B.C. the merchant adventurers of Rhodes were insuring their ventures with bottomry bonds. Indeed. it is the Rhodians who are credited with the development of the root principle of present-day marine insurance, namely the "General Average" clause. The term "Average" has nothing to do with the laws of chance; rather, it is a system of apportioning the liabilities of a voyage among all parties with an interest. Rhodian law provided that "if, in order to lighten a ship, merchandise is thrown overboard, that which has been given for all shall be replaced by the contribution of all." In Roman times bankers supported the Empire's commerce by investing surplus capital in bottomry bonds, a practice which led the Emperor Justinian in A.D. 583 to fix their interest rate at 12%.
Marine insurance has been historically inseparable from the carriage of merchandise and cargoes. In 1310 the Lombards and the Hanseatic League, then rulers of western commerce, established a "Chamber of Assurance" at Bruges where records indicate that, on a single tide, as many as 150 vessels would arrive at the outer harbor.
Since the Middle Ages the method of marine indemnity has changed from "bottomry" to the acceptance of risk by underwriters. In the early days, shipowners and merchants obtained loans from bankers and money lenders, offering their vessels or goods as security, and repaid these "bottomry bonds" upon a successful arrival. If the vessel or goods were lost at sea or the venture failed, the loan was forfeit, and the lender lost all. Contemporary insurance methods are essentially the reverse of this system and generally free underwriters from direct and intimate involvement in the transactions of commercial ventures. The shipowner or merchant now purchases from an underwriter an agreement that, in case of loss or damage through specified causes or perils, the underwriter will recompense the assured an agreed amount representing usually the fair value of his vessel and/or cargo.
With the ascendency in the 17th Century of Great Britain as the world's major sea power a system of definite regulatory laws evolved. In 1601 Queen Elizabeth declared:
. . . whereas it has bene tyme out of mynde an usage amongste merchantes, both of this realme and offorraine nacyons, when they make any great adventure (speciallie into remote partes) to give some consideracion of money to other persons (which commonlie are in noe small number) to have from them assurance made of their goodes, merchandizes, ships and things adventured, or some parte thereof at suche rates and in such sorte as the parties assurers and the parties assured can agree, which course of dealinge is commonlie termed a policie of assurance; by means of whiche policie of assurance it commethe to passe that upon the losse or perishinge of any shippe there followethe not the undoinge of any man, but the losse lightethe rather easilie upon many than heavilie upon fewe. and rather upon them that adventure not than those that doe adventure, whereby all merchante, speciallie the younger sorte, are allured to venture more willinglie and more freely.
Thus was passed the first British Marine Insurance Act which established a Court of Policies of Insurance and further reinforced the by now ancient doctrine of General Average.
In the late 17th Century coffee was introduced to London from the eastern Mediterranean. It became fashionable for merchants and tradesmen to meet in the coffee houses and transact business over fragrant cups of this new drink which was claimed to "improve humours of all sortes and prevent drowsiness, making one fit for business ..." Among those houses was Edward Lloyd's, a place where the better-class merchants were wont to gather. Gradually, Lloyd's coffee house became a meeting place for many of London's underwriters, shippers, and commercial adventurers. Lloyd, seeing the opportunity offered by this specialization, began publication of Lloyd's News in 1696. Mr. Lloyd died in 1713, but his coffee house continued to flourish under his headwaiter—and son-in-law. But it was not until 1771 that seventy-nine merchants, shippers and underwriters, who regularly met at the coffee house, elected a committee to act in their common interest, and Lloyd's of London became a formally organized operation. To this day, Lloyd's is made up of individual underwriters, each with a certain autonomy and personal skill and experience.
Many underwriters had been issuing "gambling" policies, insurance covering such things as the result of political elections or the life expectancy of prominent citizens who might be ill and dying. It was agreed to put an end to this and, in its move toward standardization, Lloyd's developed a printed policy form which was approved by Parliament in 1779.
To the present day, the language of Lloyd's original standard form can be found in marine policies throughout the world. The quaint phraseology of the "Perils Clause" is still in use:
Touching the Adventures and Perils which we, the said Underwriters, are contented to bear and take upon us, they are of the Seas, Men-of-War, Fire, Lightning, Earthquake, Enemies, Pirates, Rovers, Assailing Thieves, Jettisons, Letters of Mart and Counter-Mart, Surprisals, Taking at Sea, Arrests, Restraints and Detainments of all Kings, Princes and Peoples, of what nation, condition or quality soever, Barratry of the Master and Mariners, and of all other like Perils, Losses and Misfortunes that have or shall come to the Hurt, Detriment or Damage of the said Vessel, &c., or any part thereof; excepting, however, such of the foregoing Perils as may be excluded by provisions elsewhere in the Policy or by endorsement. And in the case of any Loss or Misfortune, it shall be lawful and necessary for the Assured, their Factors, Servants and Assigns, to sue, labor and travel for, in, and about the Defense, Safeguard and Recovery °r the said Vessel, &c., or any part thereof, without prejudice to this Insurance, to the Charges whereof the Underwriters will contribute their proportion as provided below. And it is expressly declared and agreed that no acts of the Underwriters or Assured in recovering, saving or preserving the property insured shall be considered as a waiver or acceptance of abandonment.
This enumeration is both very specific and, again, so broad as to seem absurd. During the centuries of its use, Admiralty Courts have interpreted, defined, and closed any ambiguities, and most underwriters are hesitant to develop other, more current, terms and expressions fearing that the long process of judicial definition would only begin anew.
The principles of ocean marine insurance are applied to commercial operations today as they were in Edward Lloyd's time. The great tankers and cargo vessels are covered by policies which are dark with fine print. Insurance for yachts and watercraft without commercial enterprise, however, is gradually evolving a vocabulary of its own. Yachting is a relatively recent pastime, and it is only in the last half-century that it has become available to almost everyone. By 1970 more than 200,000 pleasure vessels over twenty-six feet in length were registered in the United States alone. That number increases by thousands each year.
Let us imagine for a moment that on a magical summer's afternoon you have stumbled across that perfect little sloop which has so long been in your mind's eye. A recent legacy allows you the luxury of real speculation. The owner notices your interest, invites you aboard for dinner, and by the end of the evening has agreed to sell it to you. You pay cash the next day and the title is transferred. Now it is your turn to consider the "gamble." You have, of course, immediately assumed liability for injury to others inflicted either directly or indirectly by this new property. If the boat's mooring lines part in a strong blow and she is swept down upon your neighbor's more securely moored racing machine, stoving in its topsides, can you afford the yard bill? Can you afford repair even of your own new beauty? Are you willing, then, to "gamble" the price of an insurance premium against such liabilities which may well be beyond your control?
Each underwriter has his own formulas for the calculation of premiums, particularly in yacht insurance. All begin with a figure derived from past records. Some begin with a base rate and apply surcharges; others begin with a higher rate and make deductions. Rates will certainly be lower if the vessel is new and sound and remains in home waters with her experienced owner. Though "collision" is the most common claim, "fire" causes the greatest financial loss for the insurance companies.
The marine surveyor is the primary working tool of the underwriter. On vessels over twenty-six feet in length a survey of age, condition, seaworthiness, equipment, etc., is usually required by the underwriter. The surveyor's opinions provide the data necessary for the underwriter to establish his premium or, in some cases, to refuse to accept the risk. An underwriter is under no obligation to "gamble." There are no "assigned risks" in marine insurance.
The most significant factors in determining the recent rapid rise in yacht policy rates are repair and replacement costs. In 1965, underwriters paid about six dollars per hour for repair yard labor; in 1976 these rates have risen as high as twenty-two dollars per hour. The price of hardware and construction have, over the same period, gone up as much as 300% for some items. One must remember as well that marine insurance is indemnity, or "making good." New is replaced for old when repairs are effected. And, like other types of insurance, Admiralty Courts have been making high awards to claimants. Surprisingly, over the last ten years, despite the increases in insurance rates, when expressed as a value of the vessel they have actually gone down.
Unless you are required as a condition of a loan to purchase insurance, the decision remains yours as the owner. Because trade warranties define navigational boundaries (usually within a set radius of home port), travel beyond these limits requires additional endorsements and premiums. Some transoceanic yachtsmen, who find the costs prohibitive, elect not to purchase insurance. Many uninsured enjoy successful adventures; others become the grist of sad tales passed from boat to boat.
The sea itself is a gamble. The elements of nature are at best uncertain, and at worst disastrous. And those mariners who transfer risks through the purchase of insurance must be cautioned never to fall prey to false security. In a disaster, papers and fine print will do little to avert or allay trouble. Later, perhaps, when perils have been avoided or met and overcome (or when the sea has triumphed), the gamblers can count their wins and their losses as they have since history began.