Does ICC-A cover fraud by a buyer?

If an intended buyer of goods commits a fraud, will the cargo insurance policy of the insured/seller on ICC-A terms respond? The quickfire response of any self-respecting Marine underwriter would be NO. This is a financial loss while the cargo insurance policy would cover ‘physical loss or damage’ to the cargo only.

If the question is rephrased as follows — The intended buyer takes delivery of the cargo fraudulently and does not pay the seller, will the policy on ICC-A terms respond? A slight pause and then the same iteration — ‘But where is the physical loss or damage to the cargo? If the buyer has taken delivery without payment, it will be a financial dispute and the unpaid seller has to fight it out legally. However, the doyens of marine insurance have a different take on this issue and their strong views are backed by judicial pronouncements of different courts. Surprised? Let us examine the opinions and the judgements. They opine that ICC-A i.e. an All-Risks policy will have to pay the unpaid seller in cases where the buyer indulges in fraud to take wrongful possession of the goods shipped to him, without paying for the same.

In Glencore International AG vs Alpina Insurance, the collapsed Metro group was at the center of the litigation. The Metro group through its companies operated a floating oil storage facility on numerous vessels berthed off the Fujairah coast. A number of companies including Glencore had entrusted oil to the Metro storage for subsequent transits and sales. Also Metro group was in the business of providing bunkers to vessels and for this the group would buy oil from the traders who had stored oil in floating storages. Glencore was one of them that had sold oil to the Metro group but had not been paid for it. One fine morning, the lenders of the Metro group moved in as the group was deep in debt and on the verge of collapse. The lenders enforced their lien on the oil stored. It came to light that some parcels of oil had also been diverted by Metro group to other locations for sale and they never touched the storage facility in Fujairah. Glencore was one such affected party and they lodged a claim under their Open cover arrangement with Alpina. The cover was on All-Risk terms including transit and storage. Alpina declined the claim citing a variety of reasons — No physical loss to the cargo, fraud, misrepresentation, valuation, etc. The Queen’s Bench division, Commercial Court, London ruled in favor of Glencore. John Dunt while quoting the judgement explains it crisply — ‘ When a buyer gains possession of the goods without intending to pay for them, this is Theft or Conversion and not merely a credit loss’. (Theft is of course covered under ICC-A).

There can be different ways in which a delivery of goods to the intended buyer can happen without the buyer having paid for the goods and more importantly, having no intention of paying for the goods. 1) Taking delivery using a forged Bill of Lading 2) Taking delivery using the original Bill of Lading but fraudulently obtained without payment 3) In case of long-continuing relationships between buyer and seller, a practice may have evolved of the buyer always making payment/part payments but taking delivery without the original Bill of Lading in lieu of which they would issue a Letter of Indemnity holding the shipping company free of any liability. On a particular shipment, one fine day, buyer would have issued a LOI and taken delivery without payment and the seller would be left high and dry. How does ICC-A respond to these 3 circumstances?

In case of (1), KS. Vishwanath puts matters in perspective with his opinion –A forging of a B/L is a fraudulent act and making use of the same to take delivery of goods is an external casualty under ICC-A. As for (2), the judgement in Anbest Electronics Ltd vs CGU International provides the answers. Anbest had shipped goods to First Start Electronics and payment was to be made by them through a Bill of Exchange drawn on them. Very smartly, First Start ensured that in the Bill of Lading, Habib Bank Zurich AG was stated as the consignee with First Start being the ‘Notify party’. Accordingly, the Bill of Lading was sent to Habib Bank where the seller presumed First Start had an account. Meanwhile, Anbest got the Bill discounted too with Commonwealth Finance. In connivance with a junior staff of Habib Bank, First Start obtained possession of the original BL with the endorsement of Habib Bank without payment and took delivery of the goods. Later it was discovered that First Start did not have an account with Habib Bank. When the matter came to light, Anbest had to make good the bill amount to Commonwealth Finance. The Court ruled in favor of the petitioner, Anbest Electronics.

K.S. Vishwanath highlights two aspects that need to be established before buyer’s fraud can be made a tenable claim under ICC–A. First, did the seller have insurable interest? In the instant case, Anbest had to compensate Commonwealth Finance when First Start did not pay the Bill of Exchange. Says Vishwanath — ‘The insured i.e. Anbest retained their insurable interest throughout the voyage including at the time of loss as payment of the B/E was a pre-requisite for obtaining the B/L from Habib Bank. However, the buyer obtained the same fraudulently. Second aspect to be considered is ‘ Did the loss occur during the currency of the policy?’ The outcome of the fraud could be after the goods had landed at destination port, but this does not matter, as long as it can be established by the insured that the fraud was perpetrated during the currency of the policy.

As for (3), it being the standard practice evolved between the seller and buyer, that of taking/allowing deliveries without the original B/L by giving a LOI, a sudden failure on part of the buyer to pay for a particular consignment of goods would be impossible to establish as a fraud having occurred during the currency of the policy. As per English Law, ‘buyer’s fraud’ is deemed a fortuity under an All-risks policy. It has to be established by the insured that there indeed was a fraud on part of the buyer, it occurred during the currency of the policy and they (the insured) had an insurable interest in the goods at the time of loss.

De-learning and learning .