Are we missing the basics of marine cargo insurance?

Even as clients and intermediaries keep adding a host of clauses and conditions in the cargo policies to ensure a water-tight coverage, they often miss out on the fundamentals necessary for these clauses to be operative. This was brought home by the Commercial Court (High Court of England & Wales) in the recent judgement in the Engelhart CTP (US) LLC vs Lloyds Syndicate 1221 case.

Facts of the case are as under:

Engelhart CTP(US) LLP contracted with World Gold International Ltd to buy 9000 MT of copper ingots on ‘CIF China’ terms. In turn Engelhart sold the entire cargo to Shing Fu (HK) Metal Co. ltd in China. The first consignment of 7000 MT reached safe and sound without any incident. The second shipment of around 2000 MT in 102 containers from New York, showed signs of leaking during transshipment in Hong Kong. Representatives of Shing Fu (HK) Metal insisted on opening up all the containers in the presence of cargo surveyors. The containers never had any copper ingots but only slag of negligible value. No copper ingots had been shipped and the Bill of Lading, Packing List & Quality certificate which the insured had accepted were forged. Insured was not aware of the fraud. However, Shing Fu refused to pay and hence Engelhart lodged a claim on their insurer for loss of cargo, which was declined and hence the case.

What was the coverage under the policy?

• Institute Cargo clauses ‘A’ (1.1.2009) and/or the American Institute Cargo clauses ( 1.9.65)
• In short, the policy covered All-risks of physical loss or damage to the subject-matter insured from any external cause
• There was a specific condition stating that leakage and/or shortage and/or difference in weight and/or volume howsoever caused was covered if evidenced by an independent cargo surveyor
• Container clause which stated that notwithstanding that the seals of the container were intact, the difference in number of packages that is the number alleged to have been laden in the container and the number actually received (shortage of contents) at the destination would be payable under the policy
• Fraudulent Documents clause which stated that should there be physical loss or damage to the goods insured, due to the Assured accepting any fraudulent document of title like a Bill of Lading, the same would be covered under the policy.

Sounds like a water-tight policy had had been drafted? Yet, the insurer declined the claim and the Court upheld the decision. How?

The Court agreed that these clauses widened the scope of the policy from what would normally be covered but this did not mean that economic loss arising due to ‘ non-existent cargo’ would stand covered.

Interpreting the Container clause, the Court observed that ‘something must exist to be physically lost.’ Shortage of contents would mean the difference between what was loaded and what was discharged. There was no difference between what was loaded and what was discharged in this case.

The Court also looked at the words ‘ physical loss’ under the Fraudulent Documents clause and ruled that physical loss cannot happen if the correct, intended cargo was not there in the first place.

So, whatever be the bespoke wordings/clauses used, the basis requirement that the subject-matter ( cargo) should have been in transit in the first place, cannot be overlooked. Sounds simple but it required a Court of Law to drive home this point.