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The Court of Appeal’s recent decision in Quadra v XL revisited the meaning of insurable interest under section 5(2) of the Marine Insurance Act 1906. The Court upheld judgment at first instance, adopting a broad interpretation of insurable interest and dismissed insurers’ appeal on all four grounds.
The ‘Agroinvestgroup Fraud’, which came to light in early 2019, involved various Ukrainian warehouses issuing multiple warehouse receipts - against each of which payment was demanded - in respect of the same stored grain. Quadra was one of numerous insureds that notified claims to the London and continental markets arising out of the grain fraud. Quadra claimed an indemnity under its Marine Cargo policy in respect of cargoes of grains which were lost in the fraud. Our article on the first instance decision can be found here.
Ground 1
It is frequently the case in commodities frauds of this nature that the fraud requires that at least some goods corresponding to the underlying documents exist. The risk to insureds and insurers is that the goods are then over-pledged to multiple entities, each under the false belief that it has good and sole title to those goods.
The starting point under marine cargo insurance is unchanged, the position having been set out in Engelhart CTP v. Lloyd’s Syndicate 1221 [2018]:
One starts from the purpose of all risks marine cargo insurance, which is to cover loss of or damage to property…On the agreed facts, no copper was ever shipped, in other words, there never was any cargo of copper ingots. Consequently, there was no cargo to be physically lost or, for that matter, damaged. Something must exist to be physically lost.
The fact a policy may provide wider extensions of cover does not negate the underlying requirement for the insured to discharge the initial burden of demonstrating that the insured goods actually existed.
The Court of Appeal accepted that principle and endorsed the finding of fact made at first instance that there was sufficient evidence of the physical existence of goods corresponding to those referred to in the documents. Indeed, the Court of Appeal posited that when determining the question of physical existence of goods, a first instance judge will have regard to the whole of the sea of evidence presented to him, whereas an appellate court will only be ‘island hopping’. Absent any evidence to the contrary, the appellants could not discharge the reversed burden of proving such goods did not exist.
Ground 2
However, the Court of Appeal has drawn a clear distinction between an insurable interest in goods and a proprietary interest in goods, the former being the correct threshold for an insured to insurer relationship. The fact that the insured goods were not ascertained or part of an identified bulk is not material to the question of establishing an insurable interest in those goods. The Court of Appeal has endorsed the principles of the judgment of the Supreme Judicial Court of Maine in Cumberland Bone Company v Andes Insurance Co 64 Me 466 [1874].
Once it had been accepted that, on the evidence, the goods existed within the silos and the insured had paid for such goods and suffered prejudice by reason of their loss, it followed that the insured had an insurable interest in those goods.
Grounds 3 and 4
Although not determinative in light of the above findings, the Court of Appeal endorsed the points made at first instance that right to possession of the goods is to be considered in accordance with the governing law (here Ukraine). The risk that other insureds with separate contracts of insurance may have received an indemnity in respect of the same physical goods was not sufficient to do away with Quadra’s insurable interest in those goods.
Comment
The Court of Appeal has enshrined the general approach of the English Court to lean in favour of finding an insurable interest to exist wherever possible. In doing so, the Court has issued a stark warning to cargo underwriters that there can be:
No principled objection to payment by the insurers of several indemnities in respect of the same grain if that was the consequence of the wording of the contracts of insurance which they issued…the insurers will have received the full premium from each insured for the risk they undertook, it is unremarkable that the law should require them to fulfil their contractual obligations.
The market is therefore exposed to the risk of a scenario whereby several insureds pay for goods (which physically exist), those goods are subsequently wrongfully released or converted, and each insured is able to establish an insurable interest to those goods entitling them to an indemnity under their respective policy. The consequence for some underwriters may be contributing to several indemnities to multiple insureds in respect of the same lost goods.
That risk is enhanced further in circumstances where bespoke clauses in the form of, for example, Warehouse Receipt clauses, Fraudulent Documents clauses, Misappropriation clauses and Conclusive Proof of Evidence clauses are incorporated into policies. The possibility to depart from the fundamental rule of physical existence of the goods (per Engelhart) is capable only if clear words are used to that effect. Inclusion of widely drafted clauses may expose underwriters to a heightened risk of exposure to multiple losses in respect of the same goods.
The ramifications of this judgment will necessarily require marine cargo and stock throughput underwriters to once again sharpen their pencils and reconsider policy wordings. Curtailment of this broad approach to insurable interest may be necessary if the market is to avoid the above described scenario in future.
Related item: Late payment of claims: being wrong but not unreasonable
Insurance and reinsurance
United Kingdom