The lowdown on insurable interest

There is nothing more challenging for an insurance- and investment-focused ‘hack’ than being locked in a virtual environment with dozens of non-life insurance experts and being tasked with writing up the ensuing discussion on insurable interest. Paging through his notes following the hour-long Norton Rose Fulbright Virtual Coffee Session titled ‘Insurable interest and its effect on supply chain insurance’, this writer wished he could tackle an easier topic, like climate change or quantum computing. Alas, the brief is the brief, so let us dive in.

Establishing insurable interest

Andrew Robinson, Director at Norton Rose Fulbright SA, got the ball rolling by noting the industry’s eternal challenge in establishing insurable interest. From an insured’s side, the struggle hinges one determining whether the insured interest is “one in the good or an interest in the liability in respect of the carriage of those goods”. Fortunately, common-sense prevailed, and the substance of the day’s deliberations were deferred pending a detailed insurance theory ‘refresher’ on the difference between carrier’s liability and goods in transit (GIT) insurance, and the main parties to these transactions. 

Robinson explained that under GIT insurance, the insured is ‘cargo interest’ and the insurable interest is physical loss or damage to the cargo or loss of the adventure. For carrier’s liability, the insured is the carrier, and the insurable interest is the carrier’s liability in contract or delict. Furthermore, carrier’s liability is influenced by the terms of contract and the relationship between the carrier and the claimant. “If you are a ‘cargo interest’, you would prefer to have all risks cover per the ICC A-type clauses: the standard transit-type clauses perhaps with some additions dealing with your particular type of cargo,” Robinson said. 

“The beauty of GIT insurance is that you do not have to worry about whether or not the carrier was in any way responsible for the loss or damage that arose to your goods, so long as the loss or damage was caused by fortuity, and you could establish generally speaking what that fortuity was,” he continued. In such scenarios you can be reasonably sure of getting paid under a GIT policy following a loss. But things become complicated in the event the ‘cargo interest’ enters into a contract with the carrier, in which “the carrier and the ‘cargo interest’ agree on a limit of liability insofar as the carrier is concerned”. You were warned, dear reader, that this newsletter might get a trifle complicated.

Beware draconian trading standards

Robinson explained that in the event such contract was entered into, “the carrier would most likely operate in terms of some draconian standard trading conditions which either exclude or limit liability in a way in which the net result would be that the ‘cargo interest’ might not get paid out at all”. The carrier could just turn around and say: Yes, I have a limit of liability, but I am not liable at all, and thus the limit does not apply. In such circumstances, “the ‘cargo interest’ who might have thought that his goods were being insured in the contractual relationship with the carrier is not covered at all, and has no right of recourse against the carrier,” Robinson said. 

To wrap up this part of the theory, Robinson noted that both carrier’s liability and GIT play a part in the movement and storage of goods; but the carrier must ensure it has the right insurance, and that when it presents what it has in place to a ‘cargo interest’ it must do so properly. He also shared three ways in which a carrier might limit its liability including by limiting its contractual liability, also called owner’s risk; by limiting its carrier’s liability insurance; or by limiting the GIT cover it has put in place through limits calculated on average load or limits being subject to change, on request. 

Malcolm Hartwell, Director and Head of Transport: Africa at Norton Rose Fulbright SA stepped up to the virtual podium to describe the parties to a carrier’s liability or GIT insurance arrangement. But he first warned the cargo and marine insurance professionals in attendance to make sure that any contractual agreements affecting the GIT ‘chain’ match the insurance policy wordings. “We have seen examples where the documents simply do not match, though the parties think they do, so you really do need to carry out that audit,” he said. This is particularly relevant in a complex land- or sea-shipping environment involving multiple stakeholders, each potentially with different carrier’s liability and GIT insurances in place. 

Parties in the carrier’s liability / GIT insurance ‘chain’

Under the stakeholders heading, you need to consider the insureds, who may include a cargo owner, a principal carrier and one or more subcontracted carriers, alongside the underwriters of each. “These are all the parties in the chain, and these are the parties who have to decide whether they have an insurable interest in a particular adventure,” Hartwell said. He added that insurable interest exists for whoever holds the policy, rights under the policy or has a financial or real interest in the goods being insured. 

This interest stems from being the owner of the cargo; being a person who bears risk in the cargo; being a Bailee who is responsible for the cargo. PS, in insurance parlance, a Bailee is defined as “a person or organisation to which possession of the property of others has been entrusted, usually for storage, repair, transportation or servicing”. And the interest that can be insured centres on the goods in a GIT policy or liability whether from contract, delict or statute. In the latter liability category, Norton Rose referred to statutory requirements to remediate following a breach of environmental law as one example. 

Fun with Flags: interesting if it is your thing!

Apologies for re-using this ‘skit’, dear reader, but the ensuing discussion on the 1906 Marine Insurance Act; English vs Roman-Dutch law; and the then Financial Services Board (FSB) Letter 1 of 2012 flashed by like an episode of ‘Fun with Flags’, itself nested in the popular Big Bang Theory sitcom. The best one-liner for the technical discussion: Interesting if it is your thing. 

The English law on insurable interest is contained in the Marine Insurance Act. “This Act provides that a contract of marine insurance by way of gaming or wagering is void, before telling you  how you determine whether or not it is a gaming or wagering contract,” Hartwell explained. He added that the requirement for contract of purchase to conclude before goods changed hands was potentially contradicted by the honour clauses or ex-works agreements often used locally. We will wrap today’s newsletter with some comments ‘insurable interest’ in South African law. 

Quoting from Lorcom Thirteen (Pty) Ltd v Zurich Company South Africa Ltd, Hartwell noted that insurable interest became a policy laden assessment serving to separate enforceable contracts from those which should, in accordance with the legal convictions of the community, be branded unenforceable wagers. “The judge noted that in the case of indemnity insurance, it is generally said that the purpose of the policy is to indemnify the insured party against loss, so there has to be a loss that a third party or the injured party suffered before they have a claim under an indemnity policy,” Hartwell said. 

An owner naturally has an insurable interest

And finally, from paragraph 35 of the judgement, “the function of insurable interest in the law of indemnity insurance … shows that one cannot divorce the question of insurable interest from the type and extent of the recovery permitted by the policy. An owner of an asset naturally has an insurable interest in the asset, [which interest] will usually be an interest in the full market value of the asset”. 

Writer’s thoughts:

This discussion on insurable interest in the cargo and marine insurance context left this writer all at sea. That said, they complexity of carrier’s liability and GIT insurance left one question: Does SA’s broking community still have the depth and diversity of skill needed to advise on and place such complex covers? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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