When insurance goes metaphysical

The recent Commercial Court decision in Engelhart CTP (US) LLC v Lloyd’s Syndicate 1221 and Ors brings to mind that old chestnut: if a tree falls in a forest and no-one is around to hear it, does it make a sound? Although the case involved copper ingots and a cargo policy rather than trees in a forest, the case posed a similarly knotty question: namely, can an assured lose goods that never existed?

The claimant had bought and sold copper ingot cargoes on CIF China terms on a back-to-back basis. It had a marine cargo and storage policy written on an all risks basis and with specific concealed damage, container and fraudulent documents clauses. This was argued to be “the broadest of the broad” all risks covers.

Properly construed, the claimant said, the policy covered its loss following acceptance of fraudulent documents of title for what transpired to be non-existent goods. It ran two arguments:

Firstly, it argued the loss was covered by reference to the Container Clause which covered “shortages” i.e. the difference between the contents per the packing list and the out-turn. The claimant argued that this included losses where no cargo was shipped and that the word “shortage” had to be interpreted as covering both a partial loss and a shortage of 100%. Emphasis was placed on the phrase “alleged to have been laden in the container” which the claimant said indicated that paper losses and loss of fictitious goods were included.

Secondly, the claimant relied on the Fraudulent Documents Clause arguing that this covered a situation where it received no goods at out-turn, following payment for the documents of title containing fraudulent statements.

Both arguments were rejected. In a nutshell: (a) if the cargo never existed, there simply could not be physical loss or damage to it; and (b) the claimant’s losses were economic losses, rather than physical losses which is all that an all risks marine cargo policy will cover absent clear words indicating a broader intention.

In respect of the specific clauses, the Judge held that the word “shortage” in the Container Clause had to be given its ordinary meaning and would not cover a situation where there were no goods in the first place. As to the Fraudulent Documents Clause, the Judge held that there was an “insuperable difficulty” in that the clause provides for cover in respect of physical loss of/damage to goods through acceptance of documents of title. A distinction was drawn between this clause and that in the US case of Chemical Bank v Affiliated FM Insurance Company 815 F. Supp. 115 (SDNY 1993) where the policy covered “loss or damage” occasioned through the acceptance of fraudulent shipping documents.

The decision in Engelhart will be welcomed by cargo insurers. But, like us, they probably still want to know about that damned falling tree.

Richard Hugg