Contingent duty & containers

My first Marine post of 2020 —— however it is not about Incoterms2020 or IMO 2020-Impact on cargo insurance. It is about a question which was raised in one of the Whatsapp groups- a question perhaps not articulated well enough, understood even less and consequently the suggested answers not well reasoned out.

The question was “kIf a container (the box alone) insured under the policy, becomes a Total Loss, will the contingent customs duty on the value of the container be paid as part of the claim?”

The questioner was an Indian Claims-handler and most of the answers came from practitioners/ loss assessors overseas. So the obvious reference / assumption was that the container was covered under Institute Container clauses CL 338 or 339 and conclusions were drawn accordingly. The questioner too did not persist and soon the discussions moved to other issues but it really set me thinking.

One needs to look at the situation in a totally Indian context. First of all I must concede that I am not aware if the Customs authorities seek recovery of customs duty on a container ( owned by an overseas shipping line or leasing company) coming into India, becoming a Total Loss and hence not capable of being sent out again. Since a claim had been lodged for the same as stated by the group member, let us assume it is indeed recoverable by the Customs authorities. Question is, will the marine insurer pay this duty as part of the claim for Total Loss of the container.

In order to answer this question one needs to understand the fully-loaded structure of a Sales TurnOver Policy in India. All possible Institute clauses, Non-Institute clauses, additional coverage conditions, explanations nullifying certain exclusions, without understanding their relevance or the full impact of their addition, are packed into the policy. Some clients and intermediaries feel that a Marine Cargo policy should pay for anything, including the death of the insured’s mother-in-law. On a serious note, let us limit ourselves to 1) Contingent Customs Duty 2) Containers as cargo.

When any dutiable cargo is imported into India, customs duty is levied on it. However, the Government in a bid to promote exports has made certain concessions. If a material is imported, which goes into the manufacture of a product which is meant for export, customs duty on the imported material is waived. Why? To make the finished product less costly and consequently more competitive in the international markets. This regulation comes with a rider — If the imported material on which duty is not charged on import gets damaged or destroyed or lost, as a result of which the export obligation of the finished product is not met, THEN the exempted customs duty is recoverable by the Customs authorities. Recognising this exposure contingent upon loss/ damage to the imported material, cargo insurers started adding Contingent Customs Duty cover to their Sales TurnOver policies. So far so good.

No value or sub – limit is assigned to the Contingent Customs duty. No limitation put in as to the category of materials on which this cover for Contingent duty would be applicable. This creates the problem.

Under subject-matter insured, apart from the customary raw materials, semi-finished good, finished goods, packing materials,etc incidental to the insured’s trade is ALSO added containers as cargo. I have discussed the concept of “ Insuring Shipping Containers” in the Indian context in an earlier post. The Indian importer/ exporter has a contractual liability to the owner of the container for safe-keeping of the container whilst in his possession. Again, recognising this need, cargo underwriters add a limited cover for containers as cargo under Sales TurnOver policies.

No doubt, a container coming in from abroad does not go into the manufacture of any product which is meant for export. However, if it becomes a Total Loss whilst in transit in India and the claim for the container loss is settled by the insurer to the importer/exporter/ container owner

AND

if the Customs raises a claim for contingent duty on the container owner/ importer/exporter

AND

if the policy carries coverage for Contingent customs duty as described earlier and containers as cargo, can the insurer escape liability? I think NO. Views welsome