Rejection risk insurance

Rejection risk insurance  — A very good talking point. During business reviews, this is often cited as a new area of insurance being explored……… but post the review nothing much happens. Half-hearted attempts to underwrite/ popularize this class of insurance finds many roadblocks — 1) Limited market 2) Basic information not forthcoming 3) Not enough capacity or rather not too many insurers willing to put in capacity. 4) Insufficient knowledge about the product.

The attempt here is to address point number (4) and demystify the product.

Rejection risk insurance provides cover to exporters against the risk of their shipments getting rejected by an overseas Government authority, department or agency under pre-defined protocols. It is therefore apparent that this cover will be needed only by exporters who sell goods to countries where the import protocols are extremely stringent. Typically exporters of meat and seafood go in for Rejection risk insurance, though it could be made applicable for agricultural products as well and even fertilizers.

The primary reasons for rejection by a Government agency or department are two-fold:  1) Some contaminant found in the shipment 2) Fear (real or perceived) that the subject-matter may carry organisms that may pose a health hazard in the importing country.

The question which must be uppermost in ones mind will be that Institute Meat clauses can cover these contingencies : or Institute Cargo clauses ‘A’ with Fear of Loss cover added to it should suffice. Why have a Rejection risk insurance? What is so special about it? The essential difference is that while the Institute Meat clauses & ICC-A can cover physical loss, damage or expense by named perils ( or perils not specifically excluded), during the transit, Rejection risk cover is totally different. It covers PRE-SHIPMENT and in come cases of meat, even PRE-SLAUGHTER issues leading to the rejection. Considering the nature of cover, Rejection risk cannot be said to be Marine Cargo insurance, but strangely it is provided as an add-on cover under a Marine cargo policy only. If there is a physical loss/damage to the subject-matter whilst in transit, whether or not the cargo is rejected, the underlying cargo policy will come into play according to its own terms & conditions and the claim could be a partial or total loss. Examples of reasons for rejection could be presence of bone fragments or hair in the meat or higher than permitted percentage of chemicals in the cultured shrimps ( brackish water prawns).

Rejection could lead to 3 different types of financial losses to the exporter —

• The subject-matter rejected may be totally destroyed or ordered to be destroyed by the overseas Government authority.
• Despite having been rejected, the Government authority does not order destruction of the subject-matter but allows it to be used for alternate purposes in the same country, which could lead to a substantial reduction in value. Eg. The subject-matter may be rejected for human consumption but allowed to be used as manure or animal-feed supplements.
• If the rejected cargo is not allowed into the importing country at all, the additional costs involved in transporting the same to an alternate market or bring it back to the country of origin.

All three eventualities stand covered under the Standard Rejection cover under Rejection clauses 1/5/95. Extended Rejection cover, which is not easy to obtain covers diseases in the animals which were ‘pre-slaughter’ in origin like E-coli or salmonella which come to light on a microbiological testing of the meat in the importing country.

If there is a policy, there must be exclusions too. Following are the exclusions under Rejection risk insurance:

• Breach of warranty that the subject-matter is produced, prepared and packed according to the regulations of the country of origin and fit for export to the intended country
• Breach of warranty that the consignment be certified by a Lloyds agent or approved surveyor prior to shipment following a physical examination
• Breach of any conditions/warranties set out in the underlying Institute clauses attached to the Rejection risk extension
• Mis-description of the  subject-matter insured
• Loss of market
• Omission or error in the contract of sale or other document
• If any embargo/prohibition is imposed by an importing country, shipments sailing after the date of embargo/prohibition.

Rejection insurance cover would cease at the warehouse/cold-storage/port of discharge when: a) The goods have been passed by the Government/agency in the importing country (OR) b)  On expiry of 30 days after discharge from the overseas conveyance, whichever shall occur first.  At times, the subject-matter is allowed to be moved inland under ” cord & seal” i.e. without inspection at the port and the condition that inspection is carried out at the final destination. This can be held covered subject to underwriter’s approval and payment of additional premium. There is an extension for Secondary Rejection too. Here the Government/its agency passes the subject-matter on the basis of physical inspection alone  and later rejects the same upon testing. This extension will terminate 180 days after passing of original physical inspection.

Risk management and adherence to SOPs is the key not only for the transit but more importantly in the time following a rejection. This is something underwriters are wary about. The typical documents needed for issuance of this Rejection risk insurance extensions are as below:

• Commercial invoice
• Certificate of origin
• Net weight certificate issued by the insured
• Analytical report of a Government-approved laboratory including results for E-coli, salmonella, etc. and confirming the results are in line with the regulations of the country to which the exports are being done
• Heath inspection certificate issued by the Ministry of Health in the exporting country
• Survey report on the external condition of the cargo, prior to loading by a Lloyds agent or approved surveyor.

Being a niche area, the information required is quite exhaustive. Is it worth taking the effort? Your call.