Brand, Control and Fear

A reading of the ‘Risks clause’ under the Institute Cargo clauses will reveal that the policy intends to cover ‘ loss of or damage to the subject matter insured…….’. The principle of Indemnity kicking in here no doubt, even if marine cargo is an ‘Agreed value’ policy. The value could include profit margin but the basic requirement for a tenable claim under the policy would be a ‘loss of or damage to the subject matter insured’.

As businesses develop, Brand values have assumed tremendous importance. Companies spend huge sums of money in brand-building activities (Logos, Brand recognition, Brand recall, Brand ambassadors, etc) and involve Brand specialists, a new breed of marketing professionals but ultimately the success or value of a brand is determined by the consumers. How do they recognize a brand as valuable or not? It is based on the quality of the product or service offered — in short the ‘value perceived’ by the buyer. In due course, buyers start associating a particular brand with quality which may manifest in the form of various attributes. So much so that a buyer will be willing to pay a higher price for a brand when cheaper options are available because he perceives  a value of using that branded product.

One may wonder what is the relevance of Brand value of a product which may run into billions of dollars with marine cargo insurance wherein the value insured represents the physical value/selling price of the product in question. Brand protection clauses are increasingly sought by assureds/intermediaries and insurers often grant these covers, unmindful of the wordings and their implications and whether these Brand protection covers have been appropriately priced or not. In case of claims, it often leads to conflicts as the assured, the intermediary and the insurer have different understanding and interpretation of these Brand protection clauses. Assureds seek these covers as they would not want a damaged/deficient product being sold in the market under their brand name. There could be huge liability claims lodged by aggrieved customers against the assured, apart from sharp erosion of their brand name/value.

As these Brand protection clauses are not Institute clauses, different versions abound. The clause most often sought by assureds/intermediaries is the Brand clause. One of the common wording of the Brand clause is as under:

“In case of damage to property bearing a Brand or Trademark, the sale of which carries or implies a guarantee, the salvage value of such damaged property shall be determined after removal of all Brands or Trademarks. The costs of removal of the Brand or Trademark shall form part of any valid claim hereunder. On containers from which the Brands or Trademarks cannot be removed, the contents shall be transferred to plain bulk containers. With respect to any merchandise and/or containers from which it is impractical to destroy all evidence of the Assured’s connection therewith, this policy shall cover the costs of disposal and/or destruction of the said merchandise and/or containers.”

A few points emerge from this wording of the Brand clause —-

• There is a damage to the subject-matter insured (Risks clause fulfilled)
• The claim is tenable under the terms and conditions of the policy
• The damaged subject matter has salvage value
• If the damaged subject matter is to be sold as salvage in the market, all references to the Brand/Trademark ought to be removed. The costs involved in removal are also payable as part of the claim
• If it is impossible to remove references to the Brand, then the damaged subject matter shall be destructed to the satisfaction of the insurer. In practice, the assured at times, chooses to retain the same at a notional salvage value.

There are other versions of this clause with minor modifications, but the problem arises when it is styled as Brand clause but is intended to function as Control of Damaged goods clause.  A specimen wording will explain this.

“Brands and Trade Marked Cartons Clause:
Where any goods involved in a loss recoverable under this contract bear embossed or indented brands, labels, design or other permanent markings identifying the Assured or their Contracted Party, or the sale of which carries or implies a guarantee of the Supplier or of the Assured, or contain exclusive or secret formulae, then the Assured shall retain full rights of possession and control of all such goods.
Insurers are to pay a total loss on any and all goods and packaging that the Assured elects to either destroy or return to their premises, or recondition, Insurers being entitled to such salvage as may be obtained.
The Assured, shall be the sole judge as to whether the goods involved in any loss
hereunder are suitable for marketing and no goods deemed by the Assured to be unfit for marketing shall be sold or otherwise disposed of except by the Assured or with the Assured’s consent, but the Assured shall allow Insurers any salvage obtained on any sale or other disposal of such goods.”

So how does a Brand clause differ from Control of Damaged goods clause? Both these clauses come into play when the Branded subject matter is damaged and the claim is tenable under the policy. While in case of Brand clause, the salvage can be disposed off in the open market BUT after removing all references to the brand, in case the policy has Control of Damaged goods clause, the assured will have the sole right or control to decide if the damaged goods are to be sold as salvage at all or destructed or reconditioned. The insurer will however be entitled to the benefit of salvage, in case assured decides to dispose off the damaged subject matter.

Confusion sets in when assureds/intermediaries having the Brand clause wording stated first, believe that they can have total control of the salvage. This is often misinterpreted to such an extent that assureds say the insurer should pay a total loss with the damaged subject matter being retained by the assured at NIL salvage value.

The brand protection issue becomes more complex and a nightmare for insurers, if the Control of damaged goods clause is renamed as Control of goods clause or in other words, the intent is to obtain a Fear of Loss cover. Under Fear of Loss, there need not be any physical loss or damage to the subject matter, following the occurrence of an insured peril, but the assured fears that there could be internal damages, loss in quality/efficacy or deficiencies in the subject matter which could crop up later — all or any of which will affect their brand image/value and possibly invite liability claims at a later date. Fear of loss goes beyond the Risks clause of the Institute cargo clauses. Two sample wordings of the Control of goods clause would better illustrate the concept.

Wording 1

” In case of damage, or if the Insured reasonably suspects damage may exist, to goods and/or merchandise and/or property insured under this policy, the Insured is to retain full and absolute discretion and control over the disposition of all such goods and/or merchandise and/or property. It is understood that the Insured shall be the sole judge as to whether disposal or sale of such goods and/or merchandise and/or property is detrimental to its interest. Any goods and/or merchandise and/or property which the Insured deems unfit for sale or which it is unable to sell or dispose of under its agreement with any trade association or other entity, shall be treated as a constructive total loss, and the Insured shall dispose of the goods and/or merchandise and/or property to its best advantage with this Insurer being entitled to its share of the net proceeds resulting from such disposition, or the goods and./or merchandise and/or property shall be destroyed after notification to this Insurer and any expenses incurred in connection with such destruction shall be borne by this Insurer. This Insurer shall be given the opportunity to have a representative in attendance during such destruction.”

Wording 2

” It is agreed that should the Assured have reasonable grounds to suspect loss may have occurred to the subject matter insured following an incident due to a peril insured under this policy, or to the carrying conveyance, or at their place of store and the Assured has genuine reason to destroy the subject matter insured in the interests of safety or public confidence, then the subject matter insured shall be treated as a constructive total loss.
The Assured at their option shall dispose of the subject matter insured to best advantage with insurers being entitled to their share of the net proceeds resulting from such disposition, or the goods shall be destroyed and any expenses incurred in connection with such destruction shall be borne by insurers subject to insurers being advised prior to such disposal.”

If one looks at the issue from the assured’s point of view, request for Fear of Loss cover may well be justified, especially if the assured happens to be a major multinational brand. Insurers could look at providing this cover selectively, taking into account the track record of the assured, their standard operating procedures and risk management practices , adding suitable warranties, high levels of deductibles for losses claimed under this head and above all — a very high rate of premium. The assured may well take a call on the probability and severity of instances where they could seek refuge under this extended cover vis-a-vis the high rate of premium. At least this will serve to remove the uncertainties/misplaced assumptions/misrepresentations and ensure Contract Certainty.