The concept of Insurable Interest – Bottomry & Respondentia Bonds.

Insurance of  cargo in transit from one place to another and insurance of the vessel transporting of the same offer most interesting challenges to Insurers.  Unlike any other insurance this is codified by a strong statute enshrining all features in to the law enacted by Parliament and known as Marine Insurance Act 1963.  The subject matter of insurance in a Cargo policy is the ‘cargo that is in transit from place primarily by sea as also by other modes of transportation’.  The insurance coverage is sought by owners of cargo (Seller / Buyer; Consignor / Consignee …) though there could be more interested parties in the transit that is sought to be insured.

Sec 7 of the MI Act 1963 defines Insurable interest as :

    (1) Subject to the provisions of this Act, every person has an insurable interest who is interested in a marine adventure.

    (2) In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequence of which he may benefit by the safety or due arrival of insurable property, or may be prejudiced by its loss, or by damage thereto, or by the detention thereof, or may incur liability in respect thereof.

It looks pretty plain and simple but has many intricacies, interpretations with wider ramifications, case laws and more.   Sec 12 of the MI Act 1963 expands its scope by stating that :  12. Bottomry  -  The lender of money on bottomry or respondentia has an insurable interest in respect of the loan.

Now that would make our understanding the concept of insurance and insurable interest more complex.  Insurable interest, in simpler terms is the right to insure (in taking out a policy and getting indemnified by the Insurer in the unfortunate event of a loss or damage to the subject matter insured).  A policy generally is taken by the owner of the goods who would obviously be benefitted by the arrival of the goods at the destination or would be put to loss by the non arrival of the same.   Just as in property insurance, there could be other parties who are interested in the voyage, for example a bank having provided loan to a machinery.  Here they would be interested only on the loan amount and to the extent of such loan only – rather than the actual voyage or the subject matter.

Bottomry and Respondentia can be likened to the bank loan on a machinery…..  probably they have a specific mention in the MI Act 1963 because it follows the UK MI Act 1906 during which time and earlier these would have much more prevalent…. – in the modern day they have little meaning as they are almost non-existent but for theoretical instances of loans made at a port of refuge to pay for disbursements made to enable vessel’s continuance of voyage.

thames boats - photo courtesy : dailymail.co.uk

Conceptually, Bottomry and Respondentia are loans made on the hull and cargo respectively.  As the lender has provided money, they are interested in the safety of ship and /or cargo, as the lender could be prejudiced by any loss or damage to the subject matter of the loan provided by him.  Naturally, the lender under Bottomry or Respondentia bond has insurable interst only up to the extent of loan advanced.  There could also be cases, where the borrower shall be discharged from his debt only on the event of a loss caused by certain perils and in such cases, the lender has an insurable interest to the full value of the property against all other perils.

In the early days when ship commenced voyage, the interests involved were not as many,  as are  of now.  The ship owner was more often a singular entity and there would be  a few more who sent their cargo to foreign countries in that voyage.  For embarking on the voyage and returning after selling the merchandise, they required money.  It was common practice for the ship owner and cargo owners to borrow money  with which to carry on their ventures, by pledging their vessels  or their cargoes as security for such loans.   The loan was reduced  writing in  agreement of bonds.  The document setting forth the terms of the agreement was known as a Bottomry Bond when the vessel was pledged, and a Respondentia  Bond when the cargo was hypothecated.

By the terms of such agreement the sum named in the bond was loaned, subject  to the condition that it should be repaid upon the arrival of  the vessel at a named port. If the vessel was lost the borrower was discharged from his obligation. The rate of interest which such bonds carried was very high, since the lender practically  insured the property. The rate of interest charged, which like  the principal sum was payable only in the event of safe arrival,  included compensation not only for the use of the money loaned, but also for the possible loss of the money itself through the  failure of the venture.

Though this is tantamount to a coverage by an Insurer in some manner, the method was actually reverse of the present system of Insurance.  Now Insurers charge a rate of premium representing the value of cargo or ship which is to be paid in the event of the vessel or cargo being lost arising out of perils insured against.  In Bottomry, the lender would get back the money with interest if the voyage is successful.  If not, the lender will not get back his money, the cargo owner would also stand to lose when such loss occurs.

With regards

S. Sampathkumar.

18^th Oct 2011.