A memorandum clause is a provision found in marine insurance policies that limits an insurer’s liability for minor and partial losses.
The terms of such clauses would stipulate that should the losses incurred by the insured do not exceed a stated amount, then the policy would not payout for any claims.
This stated amount is usually a certain percentage of the total value of the cargo being insured.
For example, if the memorandum clause stipulates that the policy would only accept claims on the coverage when losses exceed 10% of cargo value, a $90,000 loss incurred on a cargo worth $1m would not be claimable from the insurance company. It is only when the losses exceed $100,000 (10% of cargo value) when claims would accepted and paidout.
The main reason why insurers insert such terms into policies is to protect themselves from common minor accidents that damage goods during the shipping process.
Insurers would only want to provide coverage for total loss which has a lower probability of happening.
It is not unusual to find that a lot of goods were damaged and has to be condemned after arriving at a shipping destination. This is especially so for perishable goods where a stranded ship can render them worthless.
Insurers would be exposing themselves to too much risks as small claims would come in fast and furious.
It’s just like how basic health insurance would not reimburse basic clinic consultation expenses and would only protect an individual from major illnesses.
This common loss incurred on goods being shipped is also a reason why traders who sell to overseas customers often include buffer stock on top of the ordered quantity so that the buyer would receive a quantity of the purchase that are in satisfactory condition to sell to consumers. Should some inventory be damaged, the buffer stock would make up for them.
The memorandum clause can be imposed on marine insurance policies whether they are purchased by shipping companies or businesses.
