Shocking trend in GA claims-handling

General average claims are on the rise the world over and is a cause of grave concern for cargo insurers. The number of containers with cargo on board being very large and the combined values of the cargo on board being much higher than that of the hull, vessel owners look at the option of general average at the slightest pretext. There have been challenges of the GA declarations and some of them have been successful too in recent times…….but that will be the subject of another post. The point highlighted here is the approach of some Indian cargo insurers towards handling of GA claims.

When a General average is declared, the vessel owner has a lien on all the cargo carried on board under different Bills of Lading. The cargo interests have to put up a cash deposit equivalent to a defined percentage of the cargo’s invoice value into a separate bank account indicated by the Average Adjustors before they can take delivery of their saved cargo. Alternatively, if the cargo owner has an insurance policy, an Average guarantee of the insurer is considered as adequate security & the cargo owner need not put up a cash deposit. The normal procedure followed by an assured who has purchased a cargo insurance policy when a General average is declared is as below:

Cargo owner approaches his insurer with the notice of General average which spells out the amount of the guarantee to be given ( as a percentage of the invoice value of cargo) or a cash deposit to be made along with copies of the invoice(s) and Bills of Lading. Insurer after verifying the documents would collect an Average Bond in the prescribed format duly signed by the assured/cargo owner. The insurer then issues a General average guarantee and also a Salvage guarantee ( wherever called for) but also insists on a Counter guarantee from the assured/cargo owner. Why? Should there be some shortcoming in the policy in terms of coverage, limits or deductible, the counter-guarantee provides a commitment from the assured or cargo-owner to contribute his share of the loss, if any to the insurer. It is here that a new, shocking trend is noticed on the part of certain Indian insurers. Instead of a counter guarantee, the insurers insist on a cash deposit or a Bank guarantee from the assured or cargo owner and refuse to issue a GA guarantee till this is done. Needless to add, this requirement is imposed only on small assureds and not the large corporate houses. The argument from these insurers is that GA claims take years to conclude and by that time, the assured may or may not continue with them. If there is any recovery to be made from them on the GA, it will be difficult to recover. Even with a counter-guarantee, they may have to pursue a legal route. Do the insurers have a point here? No. Even after giving every benefit of doubt to the insurers, their arguments and actions are unreasonable and can even be termed unethical. Let me explain how:

In most cargo policies, it is agreed as a condition that whatever be the policy deductible, it would not apply in case of losses arising due to ICC-C perils or war perils. General average falls under ICC-C. Let us for a moment give the benefit of doubt to the insurer and say that this condition is not there in the policy and deductible would apply even on losses under ICC-C. Will not a counter-guarantee suffice? Are the insurers looking to get an interest-free cash deposit or is the intention to make a hapless assured pay charges for years towards obtaining a bank guarantee?

If the fear is that the assured may not continue with them for many years in the future or that they would not pay up on counter-guarantees, it points to a basic distrust of the assured. So why insure such assureds in the first place? Mere topline requirements?

Let us even assume for a moment that the insurers stand is justified — If that be the case, the policy and quotes should clearly state in bold terms that in case of GA claims, guarantees will not be given unless and until the assured forks out a cash deposit or gives a bank guarantee to the extent of the policy deductible and that counter-guarantees will not be acceptable. Bringing up this point at the time when a request for GA guarantee is made reeks of unprofessionalism and can be termed unethical too. If the condition is spelt out in quotes, it will help clients, brokers and agents to make intelligent choices of insurers. No doubt, losses have to be controlled by insurers, but that should be through prudent underwriting methods and stringent choice of risks. Not through these devious methods when handling claims.

CAVEAT EMPTOR –Let the buyer beware! Clients and brokers will do well to query insurers on this aspect before placing their cargo insurance.