Misappropriation, fraudulent documents and non-physical loss: the Commercial Court provides clarification on the proper construction of All Risks marine cargo cover
Engelhart CTP (US) LLC v Lloyd’s Syndicate 1221 for the 2014 Year of Account and others [27.03.18]
On 23 April 2018 the judgment on the above action was handed down in the Commercial Court. The outcome of the case, in which Kennedys was instructed on behalf of the defendant insurers, will be welcomed by insurers as it provides certainty in respect of the proper construction of All Risks marine cargo policies.
The claimant assured brought a Part 8 claim in which they sought a declaration from the court that an All Risks Marine Cargo and Storage Insurance policy (the Policy) would respond even in the event that the cargo never actually existed.
The defendant insurers asserted that the Policy did not respond as an All Risks policy covers only losses flowing from physical loss or damage to goods which actually existed. Where parties intend for such a policy to extend to cover non-physical, economic losses, then the policy must contain express wording to that effect.
For the purposes of the Part 8 proceedings, the parties agreed the following facts:
- The claimant bought 7,000 mt of copper ingots from World Gold International on 11 August 2015 and on the same day sold 7,000 mt of copper ingots to receivers in China. Both contracts were later amended to increase the quantity to 9,000 mt; the first 7,000 mt of which were said to be shipped and delivered without incident.
- When the containers said to contain the remaining copper ingots arrived in Hong Kong for transhipment to China, some were found to be leaking. All the containers were opened in the presence of cargo surveyors who found that they in fact only contained slag of nominal value. It was agreed that no copper ingots were ever shipped and that the claimant in good faith paid for and had taken up fraudulent Bills of Lading.
- The claimant subsequently submitted a claim to the underwriters of the Policy, including the defendants, for the loss of the cargo but this was declined.
The claimant’s case was comprised of the following general assertions:
1. The Policy covered physical loss where the assured had been defrauded into taking up documents of title for non-existent goods.
The court however agreed with Luke Parson QC’s submission on behalf of defendant insurers that, on the agreed facts, the alleged losses were economic losses due to the acceptance of fraudulent documents in the expectation that they covered physical goods.
2. The Policy acted to extend cover well beyond a “standard, entry level All Risks Policy.”
It was acknowledged by the judge that an All Risks marine cargo policy is generally construed as covering only losses flowing from physical loss or damage to goods. In his findings, the judge followed the approach of the Court of Appeal in Coven SpA v Hong Kong Insurance Co  in which it was held that for the policy to extend to cover non-physical losses, there must be clear words indicating such an intention. He added at that:
“The commercial context of the construction exercise is that the presumption with an All risks marine cargo policy is to insure for physical losses.”
Whilst agreeing with the submissions of both parties that the Policy wording contained bespoke clauses that expanded All Risks coverage to a certain extent, the judge agreed with the defendant insurers that on a proper construction, the Policy as a whole could not be construed as displacing the above presumption.
3. Specific wording in the key clauses within the Policy had the effect of extending the Policy
- Container Clause
The judge agreed with the defendant insurers that the phrase “alleged to have been laden in the container” cannot have indicated that cover had extended to include goods that never actually existed, as was argued by the claimant. Additionally, “shortage” must be given its ordinary meaning and cannot cover a situation where there were no goods in the first place.
- Fraudulent Documents Clause
The judge followed the approach of the US Court in Centennial Insurance Company v Lithotech Sales LLC  and held that the word “physical” could not simply be “brushed aside” and that there cannot be a “physical” loss where the goods never existed.
If the parties had intended to cover losses of this character, they should have included clear words to that effect. Given that such express and clear words were not present in the Policy, the court held that the claimant assured was not entitled to the Part 8 declaration sought.
In light of this judgment, insurers and insureds should review policy wordings carefully to ensure that clear words are used if cover outside the ordinary scope is required.