Some interesting cargo clauses – I

The number of non-institute clauses in a marine cargo policy, whether it is a Broker wording or that of the underwriter is often taken as an indicator about the robustness of the cover provided by the policy. More often than not, a good number of the attached clauses are cosmetic in nature  and possibly added to lull the gullible insured into a false sense of Total Protection. The main purpose of the non-institute clauses are 1) To remove ambiguities in interpretation of the insuring clauses or explanatory in nature 2) Spell out how the insurer would address certain claim situations & sub-limits for the same, if any, stated. Having said that, there has been a lot of innovation in framing new clauses and ‘one-up-man ship’ among brokers/underwriters.

I have  come across a number of interesting, yet less used clauses, over the years. Not recommending that these clauses be added to all cargo policies in India but it would be prudent to be aware of their existence and where required use them with discretion & adequate safeguards. What is referred to as’ safeguard’ is the need to understand how the clause would actually work in practice, in terms of evidencing, measure of loss, pricing,etc. I propose discussing some of these clauses briefly over two or three posts. So here goes……

There could be circumstances, especially in cases of cargo in bulk, where at the discharge port, large shortages are noticed or cases of contamination. The vessel owners/Master often challenge the findings and even a joint-survey does not yield the desired result. It becomes necessary on the part of the insured to arrest or threaten to arrest the vessel  so that the vessel owner/ vessel’s P & I club comes forward to give a guarantee of payment should the loss/contamination be established beyond doubt and attributable to the negligence of the vessel. In some such circumstances, the cargo underwriters too advise the insured to arrest/threaten arrest of the vessel so that their rights under subrogation are protected. Easier said than done! Arrest of a vessel is neither an easy process nor is it cheap.. In India, one needs to approach the High Court of the State in which the discharge port is situated and request for orders to arrest the vessel before she leaves the port. The legal and other procedural expenses to secure an arrest of a vessel can be substantial and many a time, the insured would ask if the same will be reimbursable along with the claim. No ready answers & often insurers quote the golden rule of insurance – ” The insured should act as if uninsured”. 

By inserting the ARREST CLAUSE to the policy, this ambiguity is addressed. This clause states in brief that should the insured incur expenses on arresting/threatening to arrest a vessel to obtain/maintain recovery rights arising from actual or potential losses which appear to be recoverable under the policy, the expenses incurred for the same shall be reimbursed  by the insurers.

“Should it be deemed necessary for the Assured to arrest or threaten to arrest the carrying vessel in order to obtain or maintain subrogation rights directly resulting from actual losses or potential losses which would appear to be recoverable under this insurance,Insurers shall reimburse the Assured for all legal and other costs including necessary expenses incurred as a direct result of the aforesaid subrogation action(s).”

The next clause we look at, is very relevant for the Fashion industry involving exports of garments, accessories,etc. There could be instances during transit when some part/parts of the subject matter insured, (whether packed separately or together) are lost/damaged due to an insured peril, while others remain intact, but the effect being the product as a whole becomes unmerchantable. Eg. If the inner jacket of a 3-piece designer suit alone suffers damages or a fancy belt/brooch designed as part of a gown is lost/damaged with the dress remaining intact — the effect could be that the product as a whole would become unsaleable or fetch a much lower price.

The CO-ORDINATED RANGE CLAUSE, if forming part of the cargo policy comes to the aid of the insured under such circumstances. The clause would also come into play if out of a lot comprising particular sizes or colors, some are damaged/lost and the lot cannot be completed by the seller in time. It must be remembered that in the fashion industry, time is of essence. What will the compensation be? The difference between the Total value of all parts ( whether damaged/lost or not) less the reasonable realizable value of the undamaged parts/items as determined by the Assured.

” If any part or parts of the subject-matter is lost or damaged as a result of a peril insured against thereby rendering the remaining undamaged part or parts unmerchantable as complete items the Insurer will pay, subject to the limits shown in the schedule, the difference between:
a) The amount for which the Insurer would be liable under the Basis of Valuation if all parts of such items had been physically lost or damaged, and
b) The realisable value of the remaining undamaged part or parts of said items as
reasonable determined by the Assured.
If in consequence of any direct physical loss or damage insured hereunder a full lot or range of sizes or colours (provided such items are customarily sold by the Assured as complete items remaining in such lot or range), is incomplete or cannot be supplied as intended, so as to reduce the value of the remaining part or parts of said items, then the Insurer will pay (subject to the limits shown in the Schedule and provided the Assured is unable to reassemble said lots or ranges of sizes or colours from the remaining undamaged items) the difference between (a) and (b) above.”

Often, we come across instances where an innocent Assured or his agent is left holding a fraudulent Bill of Lading or other shipping documents leading to a financial loss. There are also instances of loss/damage caused to an Assured by misuse of legitimate Bills of Lading or other documents without his due authorisation. By adding the ACCEPTANCE OF DOCUMENTS CLAUSE to the cargo policy, the Assured gets the comfort of insurance coverage for such instances.

“This Contract covers physical loss or damage through the acceptance by the Assured and/or Agents and/or Shippers of fraudulent bills of lading and/or shipping receipts and/or documents or signatures and/or messenger receipts and/or other shipping documents. Also including physical loss or damage caused by the utilisation of legitimate bills of lading and/or other shipping documents without the authorisation and/or consent of the Assured or its agents.
In respect of stock throughput risks, cover under this clause will operate even though the subject matter insured may not have commenced transit at the time any fraudulent order is received by the Assured.

The last clause discussed in this post (lest it become too long) is the TAX LIABILITY CLAUSE. One may wonder why will a cargo insurer pick up any tax liability of an Assured? If a claim paid/payable under the policy is treated as an income in the hands of the Assured by an Tax authority, normally it is not the insurer’s look-out at all. However, by adding this clause to the cargo policy, the insurer agrees that, should such a situation arise, the amount payable would be increased to include the amount of tax liability, subject, of course to the overall limits of the policy. This could become relevant especially in cases of multinational or global programs, where regulations could change during the policy period, either making that particular geography an ‘admitted market’ from a ‘ non-admitted ‘one or simply there could be changes in tax regulations of that particular country.

“If, in the event of a claim being payable under this insurance, the claims payment shall be treated as income by any tax authority, the amount payable under this insurance shall be increased in such a way that the Assured shall receive after taxation the amount due provided that the liability of the Insurers shall not exceed the Limit of Liability herein.”