What it means
Traditional marine insurance covers the perils of the sea, such as storms, collisions and grounding. A loss caused from within the ship, such as a broken pump shaft or a boiler failure, was not originally treated as a peril of the sea.
In the case concerning the vessel Inchmaree, the court held that damage of that kind was not covered by the standard wording. The insurance market responded by adding an express clause that covers a list of internal causes.
These typically include negligence of the master, officers, crew or pilots, latent defects in machinery or the hull, and accidents in loading, discharging or handling cargo or fuel. The clause is therefore an extension of the basic cover rather than a separate policy.
Several limits apply to the cover. The word latent means the defect could not have been found by reasonable inspection, so ordinary wear and tear and known problems remain outside the policy.
The cost of repairing or replacing the defective part itself is usually excluded, although the resulting damage to other parts is covered. There is often a condition that the loss must not result from a lack of due diligence by the owner or manager.
If the shipowner knew of a fault and failed to act, insurers may refuse the claim. This keeps the clause from becoming a cover for poor maintenance.
For finance and risk managers, the clause matters when assessing whether a fleet is adequately covered. A shipping company with older vessels and complex machinery has a higher chance of internal failures, and the existence and wording of the clause decides who pays.
The cost of such a loss can be large, including repairs, lost hire and salvage. Wording varies between policy forms, and over time standard clauses have been updated and renamed.
Shipowners should read their own wording and compare it with the cover they think they have.
In practice
Real-world examples.
Example
A cargo ship suffers a major engine breakdown because of a hidden flaw in a bearing that passed all inspections. The owner claims under the Inchmaree extension for the damage to the engine, but not for the replacement of the faulty bearing itself.
Example
A ship's officer opens the wrong valve while transferring fuel and damages equipment. The loss arises from crew negligence, not from a storm, so it is recoverable under the clause provided the owner exercised due diligence.
Example
A shipowner is aware that a pump has been failing for months, but delays repair to save $30,000. When the pump later fails and damages the engine, the insurer rejects the claim on the grounds that the owner failed to act with due diligence.
Formula
Calculation
Amount payable = repair cost - excluded cost of the defective part - deductible
Suppose a latent defect in a ship's crankshaft causes an engine failure, and total repair costs are $400,000. Of this, $60,000 is the cost of replacing the defective part itself, which is typically excluded. The policy deductible is $25,000. The amount payable is 400,000 - 60,000 - 25,000 = $315,000, subject to the sum insured and the exact policy wording.Case study
Seen in the real world.
Seaforth Shipping is an illustrative, fictional company that operates a fleet of eight bulk carriers. One vessel suffered a sudden gearbox failure at sea, which was later traced to a hidden fatigue crack in a gear wheel that had been missed in surveys.
The total cost was $1,100,000 for repairs, including $90,000 for the cracked gear wheel itself. The insurer accepted that the Inchmaree extension applied, deducted the cost of the faulty wheel and a $50,000 deductible, and paid 1,100,000 - 90,000 - 50,000 = $960,000.
The finance director used the event to review whether the policy limits and deductibles were suitable for the fleet's age. The illustrative lesson is that the clause turns a potentially uninsured internal failure into a covered loss, but the exclusions still leave the owner with a share of the cost.
Watch out
Common mistakes.
- Assuming that any engine failure is covered, when wear and tear and known defects are normally excluded.
- Expecting the policy to pay for replacing the defective part itself, when the clause usually covers only the resulting damage.
- Ignoring the due diligence condition, which can allow insurers to refuse a claim if the owner failed to maintain the vessel.
Questions
People also ask.
Why is it called the Inchmaree clause?
It takes its name from the ship in an 1887 case, which showed that damage from internal causes was not covered by the traditional wording.
Does the clause cover storm damage?
No, storm damage falls within the basic perils of the sea, whereas the clause extends cover to internal causes such as latent defects and negligence.
Does it apply to cargo insurance?
It is mainly found in hull and machinery policies, though similar wording may appear in other marine cover.
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