Coronavirus – Challenge 1

This is in continuation to my post Coronavirus & Cargo insurance of 2nd February 2020. I had spelt out certain likely scenarios with regard to marine cargo insurance should the coronavirus thereat flare up. As of today, coronavirus has been declared a pandemic by the WHO and is rapidly spreading across the world, with Europe being the hotbed now. A portion of my earlier post is reproduced below:

“…….. the fine-print in many business contracts and insurance policies will be looked at closely, different arguments advanced and new interpretations found.”

Supply chain disruptions are the order of the day in many industries and clients are querying if there can be any insurance cover for such scenarios like a pandemic where business is interrupted but with no physical damage to their assets. On the marine cargo side, though no claims have been lodged for losses caused directly or indirectly by the coronavirus, the clauses, conditions and exclusions are being looked at with a fine comb. New situations,new challenges, new interpretations and perhaps even legal pronouncements could well be on the way. As there could be more than one complex challenge thrown up to marine cargo insurers, thought of titling this post as Challenge 1.

Was exchanging notes with a senior marine underwriter, who mentioned that coronavirus had thrown up a challenge with one of his clients posing a query and seeking a solution. In my mind this was the first of many more challenges, hence Challenge 1.

Facts of the case:  Indian importer had taken a marine cargo policy for import of certain engineering goods from China. The goods had moved from the manufacturer’s warehouse in interior China and reached the load-port, where it had been cleared for export. The shipping company had issued a Bill of Lading too. Suddenly, due to the heightened coronavirus threat, the  Master of the vessel/shipowners/charterers decided not to touch the Chinese port. As a result the shipping company cancelled the Bills of Lading already issued. The Indian importer immediately contacted the insurer and sought to know if cover under the marine cargo policy continued as long as the goods insured remained at the port, since this was not in his control. The transit according to the importer had already commenced the moment the insured goods left the manufacturer’s premises.( first moved for immediate transportation as per ICC-2009).

Notwithstanding that the goods had moved from the manufacturer’s premises for export, one needs to consider if the transfer of risk to the Indian importer had taken place as per Incoterms and if the policy taken in India had started ticking. The sale terms in the instant case was ‘Ex works’,so the cover under the Indian policy had kicked in from the manufacturer’s premises. Goods had reached the port safely, cleared for export and even Bill of Lading issued by the shipping line/their agents. Subsequently, the Bill of Lading was cancelled. So goods are lying at the port at importer’s risk.

Can this be considered as ‘shut-out cargo’? Shut out cargo means, cargo meant for shipment as per the Shipping Documents, not taken by Master of a vessel for want of space or draft restriction in part or in full or due to cancellation of the nominated vessel. The Shut-out cargo clause in policies has two limitations — 1) Fixed number of days 2) Cover is during the waiting period at the quay, wharf, including transportation to an alternate quay/wharf for alternate transportation by another vessel. Typically, the Shut-out cargo clause comes into play when the whole or part of the cargo cleared for export is left behind at the port for reasons like inadequate capacity on the chosen vessel, inadequate draft at that time, foul weather during loading forcing closure of hatches or the vessel itself not touching the port for individual reasons.In the instant case, the cargo cannot be said to be waiting for an alternate vessel, but the Bill of Lading issued had been cancelled signifying Termination of the Contract of carriage.

Termination of contract of carriage is governed by clause 9 of the Institute Cargo clauses and reads as under:

” If owing to circumstances beyond the control of the Assured either the contract of carriage is terminated at a port or place other than the destination named therein or the transit is otherwise terminated before unloading of the subject-matter insured as provided for in Clause 8 above, then this insurance shall also terminate unless prompt notice is given to the Insurers and continuation of cover is requested when this insurance shall remain in force, subject to an additional premium if required by the Insurers, either
9.1 until the subject-matter insured is sold and delivered at such port or place, or, unless otherwise specially agreed, until the expiry of 60 days after arrival of the subject-matter insured at such port or place, whichever shall first occur,
OR
9.2 if the subject-matter insured is forwarded within the said period of 60 days (or any agreed extension thereof) to the destination named in the contract of insurance or to any other destination, until terminated in accordance with the provisions of Clause 8 above.”

In this case the load-port in China is considered as the port where the contract of carriage is terminated and in terms of 9, cover under the policy also terminates. However since prompt notice had been given to the insurers, they may choose to offer cover as per 9(1) or 9(2) with or without additional premium.

There could be a faint doubt as to whether the contract of carriage had commenced at all since the cargo had not been loaded on to the vessel and was lying at the port only, though the Bill of lading had been issued. The Bill of Lading is issued by the shipping company or its agents after receipt of the export cargo in their possession along with documents evidencing the completion of customs formalities for export. In India, the Let Export order of the shipping bill provides this evidence. The Bill of Lading issued on receipt of the above is styled ‘ Received for shipment’ Bill of Lading. If an ‘On board’ Bill of Lading is sought, same will be issued only after the cargo has been physically loaded on board the vessel.

Now comes the question — Had the Incoterm been FOB, CFR or CIF, will the argument be different? Yes, since the risk transfer to the Indian importer would have happened only after the goods had been loaded on board the vessel at the Chinese port. Any eventuality prior to that would have been the seller’s responsibility. What if the terms had been FCA? Here, once the goods had been handed over to the shipping line by the seller, risk transfer takes place to the buyer and hence the Indian importer would have been concerned.

More challenges could be in store for marine insurers.Let us hope for a quick resolution to the coronavirus issue.