‘Construction risks’ in cargo policies

Yes, you read that right — Construction risks in marine cargo policies.

We are not talking about the risks which a typical Construction insurance policy would cover but the risks which a marine cargo underwriter unwittingly assumes or opens himself to judicial scrutiny following faulty construction in a cargo policy wording.

Had the opportunity to study the policy wordings of a leading cargo insurer in India. Among many minor flaws in construction, one stood out. I tried reading it again and again, yet could not decipher the underwriter’s intent.

The policy carried a warranty that read — ‘ WARRANTED if recovery rights are prejudiced, claim settlement will be done on non-standard basis at 90% of net assessed loss excluding claims due to theft and hijacking’.

Let us look at the diverse ramifications/interpretations this wording can lead to:

First, this should have been listed as ‘condition’, not a ‘warranty’. A warranty is a direction to the assured to do or not to do something OR alternately seen as an affirmation from the assured of the existence or non-existence of certain state of affairs relating to the subject-matter insured. This is neither of the two but a statement of what the insurer would do under a particular circumstance. A warranty as you are all aware is more stringent and draconian than a condition and often goes against the assured.

Second, usage of the words ‘ recovery rights are prejudiced’ in my opinion is incorrect. Recovery rights can be lost for a variety of reasons for all of which an assured cannot be held responsible. Further, as marine cargo claims are more often than not, on ‘discovered’ basis rather than ‘ identifiable occurrence’ basis, pinpointing any part of the supply chain as being responsible may not be possible. What duty can be cast on the assured? To ensure that he puts the carrier/other bailees on notice in time to protect the recovery rights.

Third portion of the ‘warranty'(?) is the killer — ‘ claim settlement will be done on non-standard basis at 90% of net assessed loss EXCLUDING claims due to theft and hijacking’. Does this mean that 90% of the assessed loss will be settled in all cases (where recoveries are not protected) other than losses due to theft and hijacking OR that in an All-Risks policy, theft and hijacking are excluded from the scope of cover? OR if recovery rights are not protected, then claims arising out of theft and hijacking will not be paid at all? An alternate interpretation can be inferred that, in case of theft and hijacking claims, notwithstanding the fact that recovery rights have not been protected, claim settlement will be at 100% of net assessed loss.

Huge policy construction risk for the insurer, lack of contract certainty for the assured, possible liability exposure for the broker for failure to notice this……… and lawyers rubbing their hands in glee.