Who may have insurable interest under cargo insurance policies?

Insurable Interest, Cargo, Sellers, Buyers, Marine, Risks, Ownership, Insurance Author: Aramayis Galichyan

1. Sellers and buyers

Because of the dynamic nature of passage of risks and ownership in international transportation of goods, either the seller or the buyer of goods may be the deemed as the party having the ownership in the cargo or the party at risk for the loss of or damage to the cargo at various points during the transportation.

In Anderson v Morice (1876) 3 Asp MLC 290 HL the words of Lord Chelmsford at p. 291 embrace the two main sources of determining whether the insured has insurable interest in the cargo insured, namely whether the insured has any proprietary rights in the cargo, or whether the insured has incurred any risk in respect of the cargo insured at the time of the loss.

If contracts of sale of goods are governed by English law, under the provisions of Sales of Goods Act 1979, the passage of risks and ownership take place at the same time, unless otherwise agreed by the parties.

In Stock v Inglis (1884) the Court of Appeal held that buyers of sugar to whom the risk of loss of the sugar but not the property in it had passed had an insurable interest, and one of the judges advised that “… it is the duty of a Court always to lean in favour of an insurable interest, if possible, for it seems to me that after underwriters have received the premium, the objection that there was no insurable interest is often, as nearly as possible, a technical objection… Of course we must not assume facts which do not exist, nor stretch the law beyond its proper limits, but we ought, I think, to consider the question with a mind, if the facts and the law will allow it, to find in favour of an insurable interest.”

Depending on whether the seller or the buyer is at risk or the owner of the cargo at the time of the loss, either the seller or the buyer may be entitled to benefit from the insurance.

Because parties of insurance contracts are usually named, it is of a critical importance for traders to arrange insurance contracts with a clear understanding of whether there is a factual expectancy of these parties either to be at risk for a loss or damage to the cargo or to be the legally recognised owner of the cargo at the possible time of the loss.

Therefore, we recommend that insurance contracts are arranged for the period of transportation, during which they will be able to demonstrate insurable interest in the cargo.

In accordance with the section 14 (3) of the Marine Insurance Act (MIA 1906), the owner of insurable property is imperatively recognised as a party having insurable interest in respect of the full value of the cargo “…notwithstanding that some third person may have agreed, or be liable, to indemnify him in case of loss”.

It has to be noted insurable interest in property insurance (marine or non-marine) may in fact be limited only to ownership rights by national legal systems, or it may be wide enough to embrace potential liability or other rights. However, the ordinary business practice in cargo insurance allows two main sources of insurable interest for sellers and buyers of goods, namely proprietary rights and the risk of loss for cargo loss or damage.

2. The bank or other trade financiers

The International Chamber of Commerce, in its publication Global Trade – Securing Future Growth 2018, 2018, Global Survey on Trade Finance, noted that according to its survey, 80% of global trade of goods flows rely on trade financing, most of which relates to micro, small, and medium-sized enterprises (MSMEs) in low-income and emerging economies. The survey indicates there is a USD 1.5 trillion deficit between the demand and supply of trade financing. As it has been shown by the survey, letter of credits (L/C) and guarantees form the core of trade financing via SWIFT.

On 01 July 2017, the revised Uniform Customs and Practice for Documentary Credits (UCP) came into effect with the purpose of mitigating the conflicts caused by national rules on letter of credit practice. The UCP were first introduced by the International Chamber of Commerce in 1933, being revised six times since then, the last revision of which is the UCP 600.

In accordance with the Article 1 of the UCP 600 the rules apply to any documentary credit ("credit"), including, to the extent to which they may be applicable, any standby letter of credit (L/C) whereby text of the credit expressly indicates that it is subject to the rules.

As provided by the Article 2 of the UCP 600 “Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation.”

The Article 5 of the UCP 600 expressly states that “banks deal with documents and not goods…”

The primary purpose of the L/C is to guarantee the payment to the seller for the delivery of goods upon providing documentary evidence of the delivery of goods in accordance with the conditions of the contract of sale. It is a common practice in international

The process of trade financing through irrevocable L/C is briefly described below:

The buyer requests L/C from his bank and concludes an appropriate agreement with the bank.
The buyer’s bank sends the L/C to the seller’s bank. The L/C states the documents set forth by the buyer, upon provision of which the buyer’s bank will release the funds to the seller’s bank.
The seller sends the required documents to its bank.
The seller’s bank sends the documents to the buyers’ bank for acceptance.
The buyer’s bank checks all the documents, verifies their accuracy, and provided that all the documents are accurate and meet the L/C terms, honours the payment.

The buyer usually grants a pledge on the cargo and documents of title over the cargo which is delivered into the possession of the bank as a security for repayment of the buyer’s debt. If the buyer fails to comply with the trade financing agreement concluded with its bank, the rights of possession of the cargo may be transferred to the bank and the bank may then prompt its right to sell the pledged property to recover the owed debts of the buyer. In cargo insurance, commonly, the insured either has to demonstrate that it is the owner of the goods or the party at risk for loss of or damage to cargo when a loss occurs, to successfully demonstrate insurable interest in the cargo.

As a general rule, the terms of a documentary letter of credit, usually place no risk of loss or damage to the cargo on the bank. The bank deals with documents and not the goods. Under such circumstances the banks risks are mainly in respect of buyer’s non-repayment of the funds released to the seller, or the failure to pay appropriate service fees.

There can be one point and one mode of transportation, however, in respect of which the bank may in fact obtain title (ownership) of the cargo, namely the holding of the Bill of Lading in case of sea carriage. When the seller hands over the goods to the sea carrier, the latter or the master or the agent of the carrier issues several copies of the bill of lading showing among other things the apparent order and the condition of the goods. One of the copies of the bills of lading is sent to the buyer‘s bank.

Only a Bill of Lading is recognised as a prima facie evidence of ownership rights in addition to being an evidence of the contract of carriage between the shipper and the carrier. The party holding an original Bill of Lading may prove its proprietary right in the cargo.

Because proprietary rights are an absolute source for insurable interest, the bank thus obtains insurable interest and the right to insure the cargo for its benefit; hence receive indemnity for any loss or damage to the cargo while it is considered as the party having title (ownership) in the goods. However, if the consignee, having his copy of the original Bill of Lading, exercises his right of ownership says by way of claiming compensation from the carrier, the Bill of Lading obtained by the bank will lose its power.

Conclusion

We would like to depict the fact that it is from all the surrounding circumstances that the nature of an insured's insurable interest should be discovered, and there is no absolute rule under which circumstances the bank may be considered as a beneficiary of the insurance contract.

For example, under a leasing financing arrangement, the bank may be the legal owner of the cargo, buying the cargo from the seller and handing over the goods to the lessee (the importer) for a certain time period, for rent, in return for an agreed interest and rental fees. The purchased goods would usually be transferred to the importer along with the ownership rights at the end of the leasing period. Accordingly, under such circumstances, the bank may obviously have insurable interest, acting as the buyer of the goods.

The primary question is whether a bank may be considered as having insurable interest solely based on its possessory rights which are limited in time and conditions as set out by the agreement concluded with the buyer.

In other words, if a bank claims to have insurable interest in the cargo and is entitled to receive indemnity, it has to demonstrate that it has suffered loss arising from a close legal relationship between it and the cargo.

The only possible situation where the bank or other financier could suffer loss as a result of the damage to or loss of cargo would be where at the time of the loss the buyer has overdue debts to the financier. Under such circumstances, the financier may be entitled to receiving and retaining that part of the indemnity which corresponds to the value of its interest, i.e. the overdue debt of buyer.

In Castellain v. Preston (1883) the Court of Appeal held that the contract of house insurance was a contract of indemnity, and Brett, L. J depicted that every contract of marine or fire insurance is a contract of indemnity, which is a fundamental rule, meaning that in case of a loss the insured is to receive no more than the loss.

The principle of indemnity is another fundamental insurance principle which supports the understanding of insurable interest. The principle of indemnity dictates the rule that only a party who has suffered loss may receive insurance indemnity. Normally, banks require cargo insurance policies to be arranged by the buyers, and do not effect insurance policies themselves. Given the mostly wide reach of insurable interest, banks and other financiers may normally effect insurance contracts and they do have insurable interest in the cargo. However they may be entitled to receive and retain only the amount of insurance indemnity corresponding to the amount of the overdue debt. If the buyer of goods does not have any overdue debt to the financier, the insured financier is required to transfer the indemnity to the buyer. Otherwise, the receipt of insurance indemnity would be unjust enrichment for the financier.