Condensation loss- A dilemma

1. A container arrives at the destination.
2. On opening the doors, it is found that the cargo has suffered water or moisture damage
3. The loss assessor examines if there are any holes in the container roof, floor or sides, then carries out a silver-nitrate test to check if there had been entry of sea-water
4. If the above comes out negative, the water/moisture damage is attributed to CONDENSATION and the claim declined even where the assured holds a marine cargo policy on ICC-A terms.

All of us would have come across such situations. The assured is aghast that his loss is not being compensated and takes it out on the broker and insurer that he has been wronged.

Many a time, the Claim-handler is not in a position to justify as to under which Exclusion in ICC-A does ‘Condensation’ fall. He quietly refers it to the underwriter, who ‘hums and haws’ and finally says that as a practice, condensation losses are not paid even under All-Risk policies. He goes on to add, no insurer would pay such losses. The assured gets irate and slams the broker who too does not have an explanation as to why condensation losses are not payable and under what exclusion do they fall.

What is condensation inside a container? When the outside temperature cools the outer walls of the container to a level below the ‘dew point’ of the moisture inside the container, condensation starts. ‘Dew point’ is the temperature at which the water vapour becomes fully saturated and water droplets start forming. These water droplets move upwards along the container’s internal walls and then on to the ceiling before falling down on the cargo as container rain or sweat. There have to be 3 essential elements for condensation to happen:

1. Presence of water vapour or moisture inside the container
2. Difference in temperature between the external and internal surfaces of the container
3. Availability of a pathway for the water vapour to move towards the cold surface

Water vapour or moisture inside the container can emanate from —

• The cargo itself, if it is hygroscopic in nature .i.e. it holds, absorbs and lets out moisture depending on the external conditions. Mainly grains, sugar, coffee, cotton, etc. 
• From the packing i.e. if the wood used in making the pallets is not sufficiently dry (green wood), then the moisture coming out could lead to condensation/ mould formation and spoilage.
• Normal moisture or water vapour present inside the container, as it is not vacuum sealed.

Difference in temperature between the outer surface and inner surface of the container can occur due to a variety of factors, primarily when the vessel moves from one climatic zone to another or where there are sudden changes in weather, or even temperature differences between day & night.

So, when there is no trace of any ingress of water from an external source but there are water damages/spoilage to any hygroscopic cargo, insurers deny the claim under condensation citing Exclusion 4.4 of the Institute Cargo Clauses-A which talks about inherent vice of the subject-matter insured.

If the condensation is attributed to the packing, i.e. insufficiently dried wood is used for making the pallets, insurers cite Exclusion 4.3 of the Institute Cargo clauses-A i.e. insufficiency or unsuitability of packing, for declining the claim.

Question is, what if, the cargo is not hygroscopic and the packing material has not contributed to the condensation at all like say, small steel coils,strapped and placed inside the container, yet getting rusted due to condensation? If the policy says Rusting & oxidation excluded, unless caused by accidental, external means. Will the claim be paid? Unfortunately No, because the interpretation is that condensation inside a container is neither accidental nor external. Always there is some amount of moisture or water vapour inside a container, even when empty, which gets condensed at times due to the reasons cited earlier. A marine cargo policy will pay only for ‘fortuitous ‘ losses and not inevitable events or certainties. Try telling this to an aggrieved assured and he would blow his top. The typical retort would be ” I have been doing business for all these years the same way to the same place and there have been no losses of this nature, so how can you say they are inevitable and not accidental?”. Valid argument, if one looks at it from the assured’s side. Further, in India there are a large number of marine cargo policies,(mainly inland transits), where number of losses(of all types) exceed 300-400,consistently every year. Typically, these policies cover auto spares, sheet glass, etc and get renewed every year with some insurer or the other at a marginally increased prices than expiring. If these are not categorized as inevitable losses by insurers, then how come condensation losses are called inevitable?

At this juncture, let me highlight a recent case Volcafe Ltd & others vs Compania Sud Americana De Vapores SA, from which certain pointers can be drawn by insurers as regards condensation losses. The case was filed against the carrier by the cargo owner. The cargo owners Volcafe Ltd had shipped nine consignments of coffee beans from Colombia to Germany on various vessels owned by the defendants.The ship owner was also the carrier and had issued Bills of Lading incorporating The Hague Rules. The carrier was responsible for preparing the cargoes and packing them into the containers. At the destination many bags were found to be water-damaged due to condensation. The cargo owner filed a claim against the carrier citing breach in his duties as a bailee. The defendants denied liability citing The Hague Rules and saying the inherent vice of the cargo had led to the loss as ordinary condensation was inevitable in a voyage across different climatic zones. Claimant’s counter was that the loss had occurred because of the carrier’s failure to take suitable precautions.

The Supreme Court of UK, while deciding in favour of the claimant held that if the carrier took shelter under The Hague Rules exception for inherent vice, he had to prove that 1) he had taken all possible steps to prevent the loss & despite that the loss had happened 2) or whatever be the step taken, the intrinsic nature of the cargo would have led to the loss. Knowing the propensity of coffee seeds to sweat, the carrier should have lined the container or provided for ventilation which he did not. 

This can be considered a landmark judgement for cargo owners, carriers and cargo insurers because it breaks the myth that some losses (case in point is inherent vice) are inevitable & if proper precautions are taken, these losses can be avoided as well. If avoidable , they could well be covered under a marine cargo policy as well.

If an assured is able to demonstrate that he has taken all possible steps to avoid condensation losses to his cargo, like following a strict SOP on checking quality of packing materials, loading, stowing, ventilation, use of dessicants, dehumidifiers, etc. and seeks cover against losses arising out of condensation, insurers should well consider doing so, even if it means charging some extra premium. In mature markets,the risk of condensation is often covered by insurers with suitable conditions/warranties. The days of saying condensation losses are inevitable, are over. Insurers should believe that no one wants these losses, least of all the cargo owners. So if better risk management is done, covering this peril should not be an issue. A simple wording of the Condensation clause often used is given below:

” Cover hereunder includes loss of or damage to the subject-matter insured howsoever arising from condensation and/or sweating and/or heating and/or humidity and/or frost and including climatic or atmospheric conditions or extremes of temperature “

The word ‘Inevitable’ should not be applied to Condensation losses. Yes, condensation being a natural phenomenon cannot be eliminated totally but its ability to cause losses to cargo can certainly be avoided/ minimised.