Labels clause- Simple? Not really

Labels clause is a common feature in most marine cargo policies these days. Different versions of the clause are in vogue but the essence of this clause is as under:

‘ Should there be a loss/damage to the labels on the insured subject-matter during transit, insurer’s liability will be limited to the cost of new labels or relabeling of the subject-matter”

Sounds fair enough. Why should an insurer pay for the full or reduction in value of the goods itself ( where goods are not damaged), when only the labels are damaged/lost? Underwriters came out with this explanatory and limiting clause after the judgement in Brown Brothers vs Fleming & others in 1902. The case related to bottles of whisky packed with straw inside cartons. During the long voyage, water entered the cartons, wetting the straw which in turn tore/discolored the labels on the whisky bottles. The whisky bottles had to be sold at reduced rates because of the damaged/stained labels and the claim was for the difference in price between sound bottles and the ones with damaged labels. The Court ruled in favour of the assured.

As trade practices changed, this clause was also enlarged to include apart from labels, capsules, wrappers or in short,packaging. So now, if only the outer packaging is damaged, the inclusion of this clause gives the insurer the right to limit liability to the cost of new packaging and not for the value of goods insured. Although no separate value is shown for the packaging/labels, the cost can well be ascertained on the basis of replacement packaging/labels produced and transported to the place where the damages have been discovered.

Is it possible to replace only the labels or packaging in all cases? The answer is No and insurers/loss assessors have to factor this aspect in, before invoking this clause and limiting liability to cost of replacement of labels/packaging. It would largely depend on two factors —  

1. If the cargo insured is medicine or any food item for human consumption, chances cannot be taken & there is also the possibility of a regulatory order seeking destruction/rejection of the entire cargo.
2. Who is the original assured? If the assured is the manufacturer, there is every possibility that he can arrange for re-labeling/ repacking and also test the cargo to rule out any damages. E.g. If the transit is from the factory of the manufacturer to his warehouse in another country and labels are damaged en route. What if the assured is a distributor who is buying the goods from the manufacturer and finds damaged labels/packaging? It may not be possible for him to get new labels/packing material from the manufacturer in all cases. Can this clause be imposed in such cases? No. Another example would clarify this point further. Had seen a case where a consignment of medicines meant for export from India to the UK was damaged by rainwater during transit at Goa port. The damages were to the packing which included the cartons and the aluminum foiled strips holding the tablets. The buyer rejected the whole consignment on hearing of the damages since it was a pharmaceutical product. The loss assessor insisted that since it was plain paracetamol and the tablets would not have got damaged, bringing the cargo back to the factory, re-packing and selling it locally could still reduce the outgo for the insurer. Assured submitted an estimate for the same, which was higher than the value of the insured cargo itself. How can that be, we wondered and discussed with the assured. The explanation was very logical and correct. They were operating as job-workers for the UK based company. All the packaging including the tablet strips carried the name and logo of the UK company. If the tablets had to be sold in India, the entire aluminium foils had to be stripped open ( in which case, the tablets would be exposed to the atmosphere necessitating testing/ re-manufacture and hence the high cost.

Recognising such situations, further refinement in the wordings of this clause has been done. In particular, I like the following wording, which makes it explicit  that should re-labeling/repacking not be possible, the full value of the cargo will be considered as the claim amount by the insurer.

Labels and Packaging clause

Where labels or packaging of the subject-matter insured are lost or damaged, insurer’s liability will not exceed

a) the cost of re-labeling or re-packaging that part of the subject-matter affected 

                                                   ( OR)

b) the insured value of the affected part of the subject-matter insured whichever

     is lesser. The maximum amount payable shall not exceed the value of the

     subject-matter insured.

Not as simple as it seems. One needs to act with common sense based on the prevailing situation and not invoke this clause blindly.