Claimants’ dilemma

Going back over a decade, when I was an underwriter, a very peculiar situation arose. One of our important clients was importing some dry bulk cargo and the same was insured with us. When the vessel arrived at the port  with no untoward incidents en route, a huge shortage in quantity (over 500 MT) was observed. ‘ Unexplained shortage’,and immediately we swung into action. We visited the port, discussed with the concerned, ascertained all details and then advised the client to initiate proceedings for arresting the vessel. No sooner this threat was issued, the vessel’s reputed P & I Club representative flew down and after evaluating the situation, issued a Letter of Undertaking equal to the value of the cargo short received.  We were pleased that we had taken timely action and deflected our potential liability.

However, our client lodged a claim on us and pushed for settlement. We pointed out that he had the P & I Club’s LOU and he should claim directly from them. Client’s contention was, what if there was protracted litigation later in an overseas Court. We agreed in writing that should such circumstances arise in future, we would compensate him but client was not convinced and insisted we, as cargo insurers pay the claim and then under subrogation,  pursue recovery with the P & I Club.

Cut to recent times —  Another large corporate house imported dry bulk cargo, which during the process of unloading got contaminated. Again, the vessel’s P & I Club was involved  as also the cargo insurers. Claim was initially lodged on the cargo insurers but then, the insured decided to pursue the claim directly with the P & I Club. Why do you think the clients in each of the two cases took totally different decisions? Do all clients face this dilemma in case of large claims?

Before getting into the two cases cited above, one needs to have clarity on the parties involved in case of ocean voyages: 1) The insured/owner of the cargo/ claimant 2) Cargo insurer 3) Vessel owner 4) Vessel charterer 5) P & I Club/ P & I insurer 6) Charterers Legal Liability insurer. Points to be noted are that in some cases the vessel charterer and cargo owner may be one and in some cases the vessel owner may be the direct carrier without any charterer in between. Another important point is that Charterers Legal Liability is not a compulsory cover, though in practice , any sane charterer would buy it.

Next question to be asked is which party is responsible for safe carriage of cargo from one point to another. This depends on who issues the Bill of Lading, on whose form and on whose behalf it has been signed. Also, this can vary from country to country. A general rule in vogue is that in case of bulk cargo, the shipowner will be the carrier of the cargo and Bills of Lading issued on his behalf in his form. One good reason for this may be that in most cases of bulk cargo, the vessel charterer and cargo owner could be one. This does not mean the vessel owner will not have recourse to the vessel charterer, if it is established that the loss was due to the negligence of the charterer or his servants, which includes stevedores. By virtue of the ‘Inter-club clause’ added to most charter parties, shortage claims, typically are apportioned between the charterer and vessel owner on a 50:50 basis. In case of containerised movements, wherein Boxtime charter party is used, the vessel charterer is considered to be the contracted cargo carrier. Most P & I clubs insist on a ‘Pay to be Paid’ clause, which means the member ( vessel owner) has to first pay the claim, produce proof of payment & then get paid by the Club, if the loss falls within the ambit of the P & I contract. In case the cargo is insured with a cargo insurer, claim for loss or damage can be lodged directly on him without going into whose ultimate liability it could be or whose negligence caused the loss/damage.

Now, to the two cases discussed earlier: In the first case, notwithstanding the Letter of Undertaking given by the P & I Club, insured did not want to get into the rigmarole of establishing ultimate liability or proving negligence. Insured took the position that there being an established, assessed shortage loss, and a valid cargo insurance policy in force, the cargo insurers have to pay up and he would subrogate his rights to them for pursuing recovery from the P & I Club. Sounds logical?

Then one may ask, why did the client in the second case choose to claim from the P & I club directly even though he too had in place a cargo insurance policy. Well, the insured was not only the owner of the cargo but also the vessel charterer. It was established and documented that the loss was caused due to the negligence of the Master of the vessel, who represented the vessel owner as per the charter party. This was not all. There were two other reasons for the insured to prefer a direct claim on the vessel owner/ P & I Club — 1) The cargo insurance policy would have paid him for the loss/damage caused to the cargo but the P & I cover would compensate him not only for the loss/damage to the cargo, but other financial loss like demurrage, fines, loss due to delay, etc. ( of course, subject to establishing & evidencing the same) 2) Had the claim been preferred on the cargo insurer, the incurred loss ratio would have gone through the roof and on policy renewal, the rates and terms could have hardened considerably.. This was also sought to be avoided.

Both were right in their own way. To each his own.