Timing of insurable interest in cargo insurance

Insurance, Cargo Insurance, Risks, Insurable Interest Author: Aramayis Galichyan

We have already talked about the standardised Institute Cargo Clauses (ICC) drafted by the Institute of London Underwriters (ILU) on the 1st January 1982 which have been reviewed and amended by the International Underwriting Association of London (IUA) and Lloyds Market Association (LMA) on 1st January 2009.

Given the wide application of these clauses by insurers from all over the world, it is important to look into what these clauses require in respect of insurable interest.

In particular, clauses 11(1) of all A, B and C clauses of both the 1982 version, and the 2009 revision clearly require that the insured must have an insurable interest in the subject-matter of insurance (insured) at the time of the loss.

The above noted ICC clauses appear to be having their requirement of the timing of insurable interest deriving from the section 6(1) of the MIA 1906 which states that the insured is required to have insurable interest in the subject matter of insurance at the time of the loss. Section 6 (2) of the MIA 1906 goes on further to add that when the insured doesn’t have interest at the time of the loss, in those cases he cannot “acquire interest by any act or election after he is aware of the loss”.

Ownership, being the most undisputable source of insurable interest in all cases, is one of the deciding factors in determining whether the insured has insurable interest in the cargo.

The requirement for insurable interest being present at the time of the loss is dictated by the nature of international transportation of goods. The rights in the cargo and risks of loss of or damage to cargo dynamically change during the whole period of the transportation and may change independent of each other. In some cases, ownership may pass from the buyer to the seller contingent on certain events or at certain points during the carriage.

The bearing of risks for loss of or damage to cargo is another major source of insurable interest in cargo insurance contracts.

Sellers and buyers may apply the Incoterms rules developed and maintained by the International Chamber of Commerce.

In the context of insurable interest, these rules are important due to their clarification of the timing of transfer of risks from buyers to sellers. The point at which transfer of risks has happened is one of the essential elements for clarifying the existence of insurable interest in the cargo at the time of the loss.

In Nanjing Resources Group v. Tian An Insurance Co. Ltd., Nanjing Branch, Wuhan Maritime Court, Hubei, People’s Republic of China, 10 September 2002 the issue of determining whether the insured had insurable interest under the policy was examined by the Court. In this case, on 23 August 1999, the buyer signed a contract with the seller for import of logs for the total price of USD 1,500,000 C&F Zhang Jia Gang or Shanghai. According to the contract, the buyer bought insurance, and a cargo insurance policy was issued on 27 September 1999. The goods had already been loaded on the ship when it sunk on 11 October 1999, and the goods were destroyed. The insurer refused to pay the claim with the reasoning that the buyer had violated the principle of good faith and had no insurable interest.

The Court considered two criteria in determining whether the insured held insurable interest, namely ownership and risk of loss of or damage to the cargo.

For the first criteria, the Court noted that it is commonly known that in determining whether the insured has insurable interest, it has to be established whether the insured has ownership of the cargo at the time of the loss. As a reasoning for the conclusion that the insured didn’t have insurable interest under the policy, it stated that the seller neither delivered the cargo according to the documents, nor received the payment according to the documents, the buyer did not make the payment according to the documents, as well as that at the time of the loss, the buyer did not legally hold the bills of lading, so it had no insurable interest.

However, it went further to observe the issue of whether the risk of loss or damage to the cargo was with the buyer at the time of the loss. The Court concluded that because the payment term in the sales contract had defects, and the loss of cargo occurred before the modification of contract the buyer didn’t bear the risk of loss of the cargo when the loss occurred.

Compared to non-cargo property insurance contracts, the most essential differentiator in cargo insurance contracts is the factor that ownership in goods and risks for loss of or damage to goods are expected not to be static during the duration of the insurance contract. The contract of sale usually defines the timing of passage of risks and ownership before the goods have been made available for transportation. Therefore, requiring the insured to demonstrate insurable interest in the cargo at the time of signing the insurance contract, might lead to a situation when only sellers of goods may be legally allowed to effect insurance contracts, and only when the rights and risks are with them. Under such circumstance, the same insured might be unable to demonstrate insurable interest in the cargo at the time of the loss, because of the risks and ownership being already with the buyer.

Conclusion

Demonstration of insurable interest in the cargo is required only at the time of the loss.

Because of the dynamic nature of international trade, both the exact date and time of transfer of risks and ownership may in many cases be unknown to the seller and the buyer at the time of signing the contract of sale.

If the beneficiary of the insurance indemnity is expressly named by the insurance policy, and at the time of the loss it will appear that the beneficiary doesn’t have insurable interest in the cargo, this will deprive the latter from receiving insurance indemnity.

For example, if under a FOB contract the buyer buys insurance even for a period from the seller’s warehouse to its final place of destination, the buyer would be able to demonstrate insurable interest in the cargo if a loss or damage occured after the goods are loaded on the ship. Usually, under a FOB contract, the risks and ownership pass to the buyer after the goods are loaded on board the ship. Therefore, under such circumstance the buyer neither will be considered as the risk bearer nor the owner; hence won’t be able to demonstrate insurable interest in the cargo.

Insurance contracts are usually arranged taking into consideration the trading terms such as Incoterms.

The entity who is expected to be the risk bearer or the owner of the goods at the time of the loss during the transportation of the goods. should be the entity named as the insured (beneficiary).