Survey warranty in cargo policies

Any warranty under a marine cargo policy is dreaded and if it is a Survey Warranty, the dread turns to paranoia, at least in India. Why? The very word ‘ warranty’ in a policy can have serious ramifications in case of a claim if it had not been complied with.( Please refer Relevance of the Marine Insurance Act). There are multiple reasons why a ‘ survey warranty’ is looked at with so much suspicion. Before we discuss the reasons in detail, let us understand why and where a survey warranty is required and what does a typical survey warranty state.

A sample survey warranty wording will read as under:

” It is condition of the policy that any cargo defined as OVER-DIMENSIONAL CARGO/OVER-WEIGHT CARGO/CRITICAL CARGO will be covered subject to satisfactory Pre-Dispatch-Inspection and LOADING/STOWAGE/LASHING and UNLOADING supervision carried out by surveyors appointed by the insurer and the survey cost will be to the account of the insured. The intimation for the survey needs to be given at least 7 working days in advance.“

Over-Dimensional Cargo or ODC is defined as — Any items (including its packaging) with dimensions in excess of 12 m length and/or 2.5 m width and/or 2.5 m height OR  any cargo which, including its packaging, will not fit inside a 40 feet closed body container, including high-cube (9’-6”) closed body container.

Over Weight Cargo or OWC (also called Heavy Lift) is defined as — Any item including packing with a weight greater than 55 MT .This weight of 55 MT may vary from case to case as decided by the underwriter in consultation with his Loss Control or Risk Management team.

Critical cargo may be defined as one, whose loss or damage in transit is likely to lead to a delay in completion of the planned project. Typically this type of cargo has long replacement lead times, be it for repairs, re-manufacture and/or re-shipping. Also the critical items are often huge, Out Of Gauge (OOG) & require specialized handling and transportation.

It will be quite evident from a careful reading of the definitions that any loss/damage to the cargo in transit can lead to massive financial losses directly as well as a indirectly ( consequential) losses by way of delay in completion of projects as per schedule. As the costs involved in these projects and project cargo is very large and since such projects are funded by financial institutions, the interest component alone could be a major drain on financial resources should there be a delay in completion of the project. Further, it is observed that in cargo of this nature, majority of the losses happen during loading or unloading from the carrying vehicle, vessel or barge mainly due to inappropriate handling or having lifting gear of insufficient capacity to lift the cargo.Another cause of damages during transit is due to accidents to the carrying vehicle or the cargo falling off, both often due to improper stowing and securing of the cargo or wrong choice of carrying conveyance. In cases where barges are used to carry such cargo, the condition of the barge itself needs to be checked as also whether the barge moves on its own power or if it will be towed by tugs. In case of the latter, a detailed study of the towage plan will also be necessary. If handled properly under good technical supervision, these complex operations can be carried out seamlessly and successfully. Insurers too, prefer project risks because, premium rates are good and if independent surveyors are appointed to carry out supervision of these operations, the entire premium gets earned in a few months unlike in case of open policies of general cargo, where the exposure is spread throughout the year on multiple transits, over seasons, climatic conditions and across varying political & social situations in different geographies during the year.

So, if a survey is for the benefit of the assured primarily and then of the insurer, why do assureds in India abhor the survey warranty?

Primarily it is the cost factor. An elaborate survey/supervision by a well-qualified and experienced surveyor/survey firm does not come cheap and it is not expected to be cheap either. Insurers insist that the survey should be carried out by a surveyor of their choice but at the expense of the assured.In developed insurance markets, often insurers quote premium for project cargo along with a fixed percentage towards survey/ supervision expenses and this is kept in a separate account and managed by the insurer. Assureds feel that this is an additional expense which could be avoided. In some cases, assureds are willing to carry out a survey/supervision as per warranty but do not agree on the choice of surveyor/survey firms. They prefer to use surveyors of their choice who may/may not have the requisite expertise for the operation but quote much lower rates. It then becomes just a question of ticking the boxes or complying with the warranty on paper. Does not really serve the purpose.

A second reason is, many assureds in India feel that the way they manage the loading, handling, lashing, unloading, etc. is the Best in class and an independent surveyor would not add any value to the process. Typically, they outsource the entire operation from start to finish (in India) to logistics providers & in some cases even the insurance becomes their responsibility. Here again, there is resistance to the Survey warranty and at times not followed on the ground. Even if the warranty is accepted,still there is insistence that the surveyor be of their choice. Logistics providers, at times cut corners and compromise on the procedural aspects. This is not a generalization but certainly a harsh reality in some cases.

A third reason often cited by assureds who are ‘ risk conscious’ is that they find the process of intimation, survey, etc. quite cumbersome, especially in case of very large organisations where the Risk Manager has to depend on a host of internal colleagues and outsiders to have a survey/supervision successfully accomplished. An easier option would be to get some ‘flexibility’ or waive surveys altogether especially when, there are competing insurers willing to do so.

A fourth reason is audacity and questioning the basic principles of insurance. I have across assureds who openly say that if I have to carry out all these surveys and safety precautions, where is the need for transit insurance? What am I insuring for? Yet, there are many intermediaries and insurers vying for their premium year after year.

Finally, it is the insurers themselves who create this mind-set in assureds. Let me explain the statement. We have seen in the earlier paragraphs, the type of cargo which when insured, survey warranty needs to be mandated by the insurers. Alas, the reality is often different. Whenever the word ‘ Machinery’ crops up in Turnover policy, most insurers as a matter of routine insert the survey warranty without ascertaining details of machinery, whether critical, whether containerized, imported or locally purchased, replacement lead times, etc. The intent is less to protect the cargo but more to protect themselves in case of any loss.Not all machinery may necessitate a survey warranty — a warranty may be draconian in some of these cases.E.g. A garment factory may be importing sewing machines for their use….. machines no doubt, but coming in containers. If the container were to get damaged in a road accident along with the contents, insurer could well point to the supervision warranty and avoid the claim. The intent being more to protect themselves, insurers do not follow up closely on the implementation part.

There are assureds whose business is the manufacture of heavy machinery which could be ODC. Is there a need for imposing a supervision warranty for all these machines getting loaded from the manufacturing premises? Yes, it may be necessary if a buyer on an ex-works purchase is insisted upon for the same by his insurer. Will not a study of the assureds SOP and a sample inspection do the trick? Came across a case where the assured was manufacturing heavy machinery which was ODC. Supervision warranty was imposed in the policy which the intermediary and assured did not initially object to. A few months later, the issue of the process being cumbersome and unnecessary was raised with the insurer, who agreed by mail to a changed process. Survey would not be insisted upon but the assured would need to send photographs of the cargo loaded on the carrying vehicle duly lashed. This process continued for sometime, however the survey warranty in the policy remained.Assured/intermediary did not insist on its deletion/ amendment. After a while, assured even stopped sending photographs of the ODC though the declarations transit were duly sent. Insurer did not insist on the photographs. Policy got renewed with the same supervision warranty and none of the parties involved had anything to say on this. On the renewed policy, there was a loss involving ODC and insurer pointed to the supervision warranty having been breached and declined the claim. Ultimately, a settlement was arrived at, but the point is why impose a supervision warranty at all in the first place for an ODC manufacturer and if there was no seriousness about its implementation?

Then there are policies which carry the warranty for supervision of ODC without there being a definition of what constitutes Over Dimensional Cargo. Assured could well say that he was not aware what an ODC was and hence did not get a survey/supervision done.

The short point is that a Survey warranty in a cargo policy must be used judiciously by insurers as a Risk Management or Loss Control tool after threadbare discussions with the assured/intermediary and more importantly after understanding the nature of cargo and the logistics flow. Once imposed, the insurer, assured and intermediary should ensure that the mandated surveys are duly carried out by the appointed surveyors and their recommendation strictly implemented. Recall a case where a pre-despatch survey was warranted for a generator. During the survey, surveyor noticed that the carrying vehicle was not suitable for carrying the generator and informed the assured orally. Assured refused to change the vehicle and went. Vehicle met with an accident and the generator was damaged. However, since the surveyor had not put the assured on notice in writing about the condition of the carrying vehicle, the purpose of the survey was defeated and insurer had to settle the claim.

Assureds and intermediaries too need to realize the importance of surveys, understand and discuss with insurers where surveys will be needed and ensure strict implementation and NOT look upon them as wasteful, additional expenditure.