Cargo Termination of storage in transit clause ( Amended)

Some readers have been asking my opinion about the draft circular of GIC Re stating that the Cargo Termination of storage in transit clause is amended to exclude all warehousing and storage risks from marine cargo policies  unless the goods are in the ordinary course of transit. People are anxious to know what impact this circular ( when formally issued) will have on cargo insurance rates, coverage expectations of clients and overall impact on the market. My humble submission would be — practically nothing and yet ….to a very large extent (in a preventive manner). Before explaining the reasons for my views, I think this is a very important step taken by GIC Re to ensure that no intentional storage gets covered under a marine cargo policy. Very rightly so. Stock Throughput policies are separate products, which we are not discussing here and even in Throughputs, the underwriting that is done for the storage portion is on par with what a Property underwriter would do.

How come ‘intentional storage’ got covered under marine cargo policies by specific mention? If one looks back, small limits and small duration of intentional storage was built in by underwriters in India knowingly and by suitable wordings to provide seamless coverage to clients. Eg. 1: Imported cargo could be stored intentionally by the importer in bonded warehouses for a week/fortnight/or a month before moving them to their factories. Eg 2: In order to provide a contingent cover for unnamed locations. All the storage locations could be covered under Property insurance but there could rise instances when the clearing or handling agents move the cargo to a totally new location and there could be a gap of a week or 10 days before the information of the change could reach the Risk Manger and he could add the new location to the Property programme. Should an eventuality happen before that, the cargo policy provided a contingency cover. This was clearly understood and agreed by certain underwriters, intermediaries and clients. A separate limit and time line was mentioned for these intentional storages and it was DISTINCT from the Limit per location mentioned in the policy, which represents ” UNINTENTIONAL ACCUMULATIONS in the ordinary course of transit”.

Underwriters, intermediaries and clients who did not understand this additional cover knowingly given for small limits and small duration of time kept increasing limits and time mindlessly and also misrepresented that the the Limit per location included intentional storage as well. Totally incorrect. Having said that, have these intentional storage covers contributed to the staggering loss ratios in the Indian cargo market?  The answer is a firm NO. Have not seen too many marine losses arising out of intentional storage. I can count 5-6 losses in a 14-year underwriting career. The precarious position of the Indian marine insurance industry is primarily due to mindless underwriting at unviable prices for top-line share.

Before looking into the wording of the proposed clause, going by the gist i.e. total elimination of intentional storage, let me explain why I said earlier of the impact “practically nothing and yet ….to a very large extent (in a preventive manner). This draft circular is to be seen in the backdrop of the circulars issued on Property insurance by GIC Re wherein minimum rates for FLEXA covers and higher deductibles for certain occupancies have been spelt out, if risks are to be ceded to GIC treaties. This coupled with the earlier increase in STFI rates, have made Property Insurance suddenly expensive, as much as 2-4 times in many cases. ‘Expensive’ may not be the right word, given the abysmal rates which were being charged and hence a better term could be ‘Re-calibration of Property Insurance rates’. Due to this re-calibration, there was always a possibility of clients and intermediaries attempting to put in all the stock coverages as part of ‘intentional storage’ under Marine cargo policies, thereby saving on some premium. This draft marine circular of GIC Re effectively blocks this possibility and hence its impact is to a very large extent in a preventive manner. 

At the other end of the spectrum, one sees marine cargo policies with obscene limits of intentional storage ( rightly stated or misrepresented by underwriters as equal to the Limit per Location) and long time duration. Were these covers really required or was it merely one-upmanship among intermediaries? Most or all of these intentional storage locations are invariably covered by clients under their Property policies.I can safely vouch for this. Do you think locations with stocks of INR 25 crores and 50 crores will remain uncovered under Property insurance just because the cover is offered under marine cargo? Not at all. Clients who buy Fire Loss of Profits policy too are usually wary of intentional storage covers under Marine cargo and would choose Property insurance any day to ensure trigger of the FLOP policy should there be an eventuality. So, removal of intentional storage coverage from marine cargo policies hardly matters. In fact, a couple of large clients are already seeking reduced marine premium rates since intentional storage is no longer covered under marine. Was premium charged for this intentional storage? No, so there is nothing to reduce and so no sound answers to such clients. So this draft circular of GIC Re appears to be more for supporting Property premium rates ( as stated in the circulars), rather than improving the rates under marine. A further dangerous trend could be that in case of large portfolios, given the increased premium under Property, there could be further pressure on marine rates and some insurers could succumb. Only saving grace is that with sudden and surprising hardening of reinsurance markets and shrinking capacities for marine, policies supported by facultative reinsurance have to perforce face rising rates, even with reasonably decent loss ratios.

Now coming to the draft circular itself, the Cargo Termination of Storage in Transit clause( Amended) gives the impression that this is a paramount clause of the Joint Cargo Committee on the lines of the Termination of Transit clause ( Terrorism) JC 2009/056. We are good enough to draft our own clauses but it must be pointed out that this clause is not a JCC clause and so what the amendment is about, am not clear. Is this a clause which all insurers have to file with the IRDAI? It is an accepted and understood fact that under any marine cargo policy, the goods are not always moving from start to finish. There will be periods when the cargo lies at load-ports, CFS, transhipment points, discharge port and so on. As long as the cargo is in the “ordinary course of transit”, that is outside the insured’s control, whether cargo is at rest or in motion, it stands covered under cargo insurance. Is there a need for a clause to explain this? If yes, the objective was to make it more apparent, then the emphasis should have been on defining what “ordinary course of transit is”

Rightly, there is the provision to extend the Duration clause by a fixed number of days which will be extremely relevant especially in case of dry bulk cargo and over-dimensional project cargo. “Sixty days overside the vessel “ under the Duration clause is not limited to the time cargo lies at the discharge port but the time within which it should reach the named final destination. This could take months in case of dry bulk cargo like coal and fertilizers and hence the need to extend the Duration clause and more important, I would state, define the term ‘ordinary course of transit’. There is widespread misconception that within 60 days overside the vessel, if cargo is placed and removed from a bonded warehouse, cover during the storage phase will continue under marine cargo policy. My humble submission is NO, as it will be hit by 1.3 of this draft circular, 8.1.2 and 8.1.3 of ICC-2009.

The draft circular further states that if inland cover is also contemplated following the extended Duration clause, again it will be limited by the Duration clause applicable to Inland Transit but excluding Terrorism. As stated earlier, the days limitation in the Duration clause or extended Duration clause refers to the time within which the cargo should reach the final named destination after discharge from the oversea vessel. So even if after the extended Duration clause, the cargo does not reach the final destination  but lies at the port/warehouse or is midway in transit, total cover under the policy would cease. If it is perceived that for the entire extended Duration period, the cargo lies at the port, then subsequent inland transit can be part of a separate policy. In either case, the reason for excluding Terrorism from the scope of cover during inland transit is not understood. Termination of Transit clause ( Terrorism) states, in simple words that cover for Terrorism would cease in line with the Duration clause. If there is any intentional storage covered under the cargo policy, Terrorism cover would not be available during this phase of intentional storage, However, if the Duration clause itself stands extended or for the inland transit a separate policy is issued, Terrorism cover should be available.

Happy to receive your views.