Claims under Sellers’ Interest clause

Sellers’ Interest Contingency — That was the term used for this cover during the eighties and nineties in the Indian market. This clause was available only to a privileged set of clients and that again after due internal approvals. There was not too much of demand for the clause either and there were hardly any claims. The opening up of the insurance sector along with the advent of brokers has made the Seller’s interest clause almost mandatory in all marine cargo policies. Insurers today do not bat an eyelid while granting this cover.

So what does this clause cover? It has been explained in my blogpost ‘ Seller’s interest clause’ of August 2018, so here I will just reproduce the standard wording of this clause used in the Indian market —

In respect of those exports sold on F.O.B., C&F. or similar terms and where the Assured are not obliged or instructed to arrange insurance hereunder, the following shall apply:

a) This insurance is to cover the interest of the Assured as seller of goods in respect of those consignments sold on “free on board” and “cost and freight” terms or similar terms dispatched on or after the commencement date appearing in the Policy.

b) This Policy covers physical loss or damage to the cargo insured, subject to the terms and conditions of the policy, to protect only the interest of the Insured mentioned therein. This insurance is not assignable to any other person who may acquire insurable interest in respect of property insured excepting a banker operating in India; any assignment other than as stated shall render the policy void.

c) Warranted that the Insured shall not change the terms of the contract of sale relating to goods insured hereunder subsequent to the operation of a peril insured against for the purpose of securing indemnity under this policy..

d) Warranted that the insured shall safeguard all contractual and other right against the buyers, carriers and other parties concerned with the transactions and transport of the goods covered herein..

e) Warranted that the Assured must use all reasonable and usual care, skill and aforethought and take all practical measures, including measures which may be required by the Insurers to prevent or minimize loss.

f) Warranted that the existence of this insurance is not to be disclosed to the buyer.

g) No claim shall be payable hereunder if either the named insured or the buyer of the insured goods is entitled to indemnification under any other policy covering the same goods, which may be in existence. Claims, if any, is payable in Indian currency only.

h) Underwriters shall be subrogated to the Assureds’ rights and benefits against the buyer and/or buyer’s insurers, and/or carrier(s) and/or other third parties.

i) This policy does not cover the risks which could be covered or which are insurable by the Export Credit Guarantee Corporation.

In short, Seller’s Interest clause is supposed to come to the rescue of a seller who remains unpaid because of loss or damage to the goods exported, (which he was not obliged to insure unlike in case of CIF/CIP), following which the buyer rejects the entire consignment. It is essentially a ‘ contingent cover’ which triggers when this contingency of the buyer rejecting the whole consignment following loss/damage and not paying the attendant invoice arises. The risk of the voyage basically is that of the buyer but following a loss/damage, if the sale is on credit basis, it becomes easier for the buyer to reject the contract rather than paying the invoice and then collecting the claim for loss/damage from his insurers.

The Seller’s Interest clause is often not fully understood by insureds, intermediaries and insurers OR well understood and misused, Either way, claims under Seller’s Interest clause are not easy to establish and get, they were not intended to. It was a contingent cover offered to a valued client.

A close reading of the clause will reveal the responsibilities it casts on the insured. Three important warranties form part of this clause, which assureds are often blissfully unaware. The existence of this Seller’s Interest cover should not be disclosed to the buyer. Secondly, all legal rights and remedies of the seller against the buyer must be protected and subrogated to the insurer on settlement of any claim under this extension. In many cases, the seller and the buyer have close business relationships and when pointed out that after claim settlement, the insurer would proceed against the buyer legally, usually there are loud protests. Insured wants the claim as well as the business relationship with buyer to continue smoothly. There have been instances, when this condition was pointed out, the claims under Seller’s interest were withdrawn.

Recall, a large claim under Seller’s interest ( approximately INR 25 million) where the export on CFR terms to a government-owned organisation in an African country got damaged and was rejected. All the documents were in order and assessment agreed too. Insurer insisted on a subrogation which the insured refused to give citing business reasons. Now the insured was a large pharma manufacturer and an invaluable client for the insurer. It was finally agreed that although a subrogation letter would be taken to complete the documentation, no recovery action would be initiated against the buyer.

Another important point to be noted is that, claim if any will be paid to the seller (insured) in India in Indian Rupees only. So, following a loss assessment, one of the documents sought by insurers is a ‘ No Objection certificate’ from the buyer, confirming that he had not effected payment of the concerned invoice and he has no objection if the claim proceeds are made to the seller. On the one hand, it is warranted that the existence of this insurance should not be divulged to the buyer, on the other a NOC is sought from the buyer. Possibly, after a loss , the warranty becomes inoperative and the existence of this insurance can be made known to the buyer. There have been instances where the relations between seller and buyer had soured following the loss/damage. Buyers had refused to issue NOC and the sellers ( the claimant) had submitted forged documents purportedly from the buyers.

At the other end of the spectrum are the cases where seller and buyer connive. The existence of this cover is well known to the buyer. A fictitious export takes place or an export showing inflated values is insured with Seller’s interest clause. The buyer gladly gives a NOC and when the insurer makes a settlement, the Enforcement Directorate lands up. Why? The exporter laps up all the export incentives and benefits given, conjures up the documentation and also gets paid under Seller’s interest. Insurers will do well to make sure that the export documentation is in order and losses, if any, after export reported to the concerned authorities.

The ease with which Seller’s Interest is granted by underwriters is often a nightmare for claim handlers.