The onus to demonstrate insurable interest

Peter Lamb, a director in the admiralty and shipping team at Norton Rose Fulbright South Africa, recently wrote an article which we thought our readers would find interesting, on commodities fraud, passing of risk and insurable interest, as set out in the Quadra Commodities decision.

The contract of sale

The insured, Quadra Commodities SA purchased two crops of wheat and one crop of barley in Ukraine between September 2018 and January 2019 from Agri Finance SA, and its related company Linepuzzle Ltd. 

In terms of the contract of sale, payment of the purchase price would be made in two parts: 80% of the purchase price would be paid by the buyer (Quadra Commodities) against receipt of the original seller’s invoice and warehouse receipt. The balance of the purchase price was to be paid upon receipt of the seller’s invoice for the balance of the purchase price; the list of discharges wagons/trucks presented by the port warehouse; and notice of the forwarding agent/customs broker at the Place of Destination noting the sufficiency of the seller’s documentation necessary for custom’s clearance. 

The contract of sale was subject to Incoterm DAP (Delivery at Place) 2010. The place of delivery was “Odessa sea trade port and/or Chernomorsk sea trade port and/or Yuzhny sea trade port, Ukraine, at buyer’s option”. In terms of Incoterm 2010, risk in the goods passed from the Seller (Agri Finance) to the buyer (Quadra Commodities) at the Place of Destination. 

Payment of 80% of the purchase price took place before the buyer took on risk or ownership of the cargo concerned. Ownership to the cargo was only transferred upon payment of 100% of the full purchase price. 

All risks clauses

Quadra Commodities had taken out a Marine Cargo Open Policy which incorporated the “All risks” Institute Cargo Clauses A (1999). The Marine Cargo Policy had a number of additional clauses, set out below: 

“Chapter 3- Storage risks 

Any storage operation taking place before and/or after any transport operation are covered under the terms and conditions of the present policy, as per attached tariff, without any time limit, and apply to sold goods or to unsold goods stored in any storage location under the custody of a third party or the Assured. 

For this part of the insurance contract, “Location’ is defined as any building, tank, silo…

The cover starts at the time the goods enter the storage location and are covered under “All-risks” terms and conditions and all other terms provided by this policy … 

Fraudulent Documents 

This policy covers physical loss of damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or their Agents and/or Shippers of fraudulent shipping documents, including but not limited to Bill(s) of Lading and/or other shipping documents without the authorisation and/or consent of the Assured or their Agents and/or Shippers.” 

Misappropriation 

This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation. 

By misappropriation is exclusively understood: 

1. The use or disposal of the insured goods, in bad faith, by a contracting party (either suppliers and/or customers) of the assured and/or the policy holder or by the servant of a contracting party, with or without the involvement of the storage manager, contrary to the purpose for which he has received the insured goods, or in disregard of the instructions given to him by the assured/policy holder and/or by any other natural and/or legal person authorised to give such instructions; 

2. The physical or legal delivery, in bad faith, of the insured goods to any natural and/or legal person by a contracting party of the assured and/or the policy holder or by the servant of the contracting party, when this contracting party or this servant was aware or reasonably should have been aware that this natural and/or legal person was not entitled to the delivery of the insured goods. 

The risks covered under this clause will start at the time the Policy holder and/or affiliated companies assume an interest in the cargo and/or are in possession of a document of title and shall end when this interest finally ceases. The present clause shall benefit exclusively to the Policy holder and/or affiliated companies and shall prevail notwithstanding other provision agreed in the Policy. 

Quadra Commodities lodged a claim under the Marine Cargo Policy for the amount of USD 5,728,343.51. 

A claim on fraud perpetrated

Quadra Commodities’s claim arose out of the fraud perpetrated by the seller (Agri Finance) and its affiliated companies. The fraud occurred by Agri Finance issuing warehouse receipts in respect of the same cargo which it had received and stored at its terminal (Elevator terminals which were around Odessa) to several buyers, including Quadra Commodities. Quadra Commodities had made part payment on receipt of the warehouse receipts in terms of the contract of sale. The fraud was only discovered when instructions to ship the cargo out where not fulfilled by Agri Finance due to there being no more cargo in the elevators. 

The underwriter rejected that claim on the basis that Quadra Commodities did not have any insurable interest in the cargo which was lost, and that no physical loss had existed in that Quadra Commodities’s loss was purely a financial loss. The second ground of the underwriter’s rejection was that it had evidence that showed the relevant elevators were storing cargoes to their maximum capacity or very near maximum capacity at the time of the purported delivery of the subject cargoes. Therefore, said the underwriter, no more cargo could be delivered into the elevators, the warehouse receipts were mere paper, and did not relate to physical cargo. The Court dismissed this part of the underwriter’s argument on the evidence which Quadra Commodities had produced at trial. The Court noted that Quadra Commodities had sent surveyors to the elevators to survey the cargo, and that the surveyors had produced survey reports which were corroborative evidence of the physical presence of the cargo at the Elevators terminal. The Court took into account that that Quadra Commodities had already taken delivery of two parcels of cargo (under separate contacts of sale). But what appeared to convince the Court of the existence of the cargo was that ‘[i]t was integral to the fraud that there should have been grain in the warehouse, which could be inspected on behalf of traders, which matched the amount of grain which was being purportedly sold to any other trader. Were there not then the fraud was likely to unravel at the very early stage. Accordingly, I consider the documents are some evidence of the physical existence of the goods corresponding to those referred to in them”. 

The Court’s judgment

The Court concluded this part of its judgment with a cautionary note and stated that an all risks marine cargo insurance policy does not ordinarily cover, situations where no property had existed (and thus has not been lost or damaged) unless the policy has been extended in clear terms. 

In relation to the first ground of the underwriter’s rejection, namely that Quadra Commodities did not have an insurable interest, the Court disagreed with the underwriter and held that Quadra Commodities did have an insurable interest in the cargo as it had paid part of the purchase price of the cargo. The Court, relying of the 1874 decision of Cumberland Bone Co v Andes Insurance Co, held that an equitable interest in the subject of insurance, in this instance, the cargo, was sufficient to establish that the insured had an insurable interest. The Court relied on this decision, and others, as well as renowned author Arnould, as authority for the proposition that “if neither property nor risk has passed, payment or part-payment of the price will give the buyer an insurable interest, because if the goods were lost or damaged and the seller was insolvent the buyer might not be able to recover the money which he had paid to them”. The Court’s position is supported by s.5 (2) of the 1906 Marine Insurance Act which states that: 

• “Subject to the provisions of this Act, every person has an insurable interest which is interested in a marine adventure. 

• In particular a person is interested in a marine adventure where he stands in any legal or equitable relation to the adventure or to any insurable property at risk therein, in consequences of which he may benefit by the safety and due arrival of insurable property, or pay be prejudiced by its loss, or by damage thereto …”. 

The Court also held that the goods were lost by the insured peril, misappropriation, as stated in the abovementioned Misappropriation clause. 

Contracts concluded in South Africa

This decision of the English court reflects the position under English law. Most of the marine insurance contracts concluded in South Africa are also governed by English law but, following the Mieke decision, our courts are enjoined to also apply the provisions of South African insurance legislation even if the contract is governed by English law. Our courts are likely to follow a similar approach to the question of insurable interest as set out in the Quadra Commodities decision. 

We have seen the courts, both here and in other common law jurisdictions, taking a less formalistic approach to the question as to whether or not an insured party has an insurable interest in the goods. The onus would be on an insured to demonstrate that it had an insurable interest, but the court in this matter observed that where underwriters have issued a policy and received premiums for the risks covered, the court should be reluctant to uphold a technical defence by underwriters that the insured had no insurable interest. 

Those involved in the insurance and international trade of marine cargoes should always try to make sure that their insurance policies are aligned with their sales contracts in two respects. First, they should ensure that the passing of risk in the sales contract is covered by the duration of cover in the policy. The second is that they should ensure that the risks they anticipate facing are covered by the policy. In an age where fraud, through the use of fraudulent warehouse receipts, bills of lading, delivery notes and other receipts is common, this is particularly important. This problem is not restricted to the commodities trade but the nature of bulk commodity cargoes make their sale more susceptible to fraud. 

The nature of the trade and the countries in which the trade is happening should be taken into account when deciding where a purchaser wants to assume risk of loss in and to the cargo and where underwriters should go on risk. All the parties should bear this in mind when buying and insuring cargo for the various risks perpetrated by fraudsters. If fraud is high in a particular country, buyers should arrange to take risk only on loading or on delivery to the country where shipment is to take place and underwriter’s risk should mirror this. 

Writer’s Thoughts
There is an important point here… as mentioned above, in an age where fraud, through the use of fraudulent warehouse receipts, bills of lading, delivery notes and other receipts is common, it is important for those involved in the insurance and international trade of marine cargoes to always try to make sure that their insurance policies are aligned with their sales contracts, by ensuring that the passing of risk in the sales contract is covered by the duration of cover in the policy and that the risks anticipated are covered by the policy. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.