Insurable Interest in Cargo Insurance Context and First Late Payment of Claim Assertion in English Law

Quadra Commodities SA v. XL Insurance and others [2022] EWHC 431 (Comm)

The assured was a commodities trader who entered into various contracts with Agroinvest Group for the purchase of grain. On receipt of warehouse receipts confirming that the relevant quantities of grain were held in common bulk in stipulated warehouses or “Elevators”, the assured paid for the grain. However, it later transpired that Agrionvest Group and the warehouses were involved in a fraudulent scheme whereby the same parcel of grain or seeds may have been pledged and/or sold many times over to different traders. The fraud unravelled when buyers sought to execute physical deliveries against the warehouse receipts and it became clear that there was not enough grain to go around.

The assured sought to recover its losses under a marine cargo policy claiming that the insured goods were lost either because they had been misappropriated or because there was a loss by reason of the assured’s acceptance of fraudulent warehouse receipts. The relevant clauses in the policy stipulated as follows:

Misappropriation
This insurance contract covers all physical damage and/or losses, directly caused to the insured goods by misappropriation.

Fraudulent Documents

This policy covers physical loss of or damage to goods and/or merchandise insured hereunder through the acceptance by the Assured and/or their Agents and/or Shippers of fraudulent shipping documents, including but not limited to Bill(s) of Lading and/or Shipping Receipts and/or Messenger Receipt(s) and/or Warehouse Receipts and/or other shipping document(s).

Insurable Interest Issue

The insurers denied cover on the basis that the assured did not have insurable interest in any of the goods which were lost and/or there was no physical loss of the property, only pure financial loss, which was not insured. The basis of the insurers’ case on insurable interest was that this was not an insurance on property but instead an insurance of an adventure, including the success of storage operations. The judge (Butcher, J) was quick to dismiss this submission by referring to various terms in the contract pointing strongly to the direction that this was indeed an insurance on the property (grain) which the assured was purchasing from the buyers. The alternative argument of the insurers was interesting and raised issues whether the assured had insurable interest in the goods. It was essentially argued that even if the insurance was on the cargo purchased, the assured had no insurable interest in the present case as the cargo in question never existed. With this argument the insurers were primarily encouraging the court to adopt a strict approach to insurable interest following the spirit of the reasoning of Lord Eldon in Lucena v. Craufurd (1806) 2 & P.N.R. 269 which suggested that only those who stand in a “legal and equitable relationship to the property” have insurable interest in the context of property insurance.
The judge was able to dismiss insurers’ argument by holding that the assured was successful, on a balance of probabilities, in showing that goods corresponding in quantity and description to the cargoes were physically present at the time the Warehouse Receipts were issued. This meant that this was not an insurance policy on goods that never existed and accordingly the assured had insurable interest on the grounds that:

• The assured had made payment for goods under purchase contracts, and such payment for unascertained goods of the relevant description was valid ground for establishing an insurable interest irrespective of whether there were competing interests in the grain. The assured, therefore, stood in a “legal or equitable relation” to the property by virtue of the payment.

• The assured was able to show on the balance of probabilities that it had an immediate right to possession of the grain and this coupled with its economic interest in the grain can give rise to an insurable interest.

This outcome in the case is in line with authorities on the subject and is not too controversial. However, the curious point is whether the court would have reached the same conclusion on insurable interest, had it decided that on balance of probability the assured failed to show that goods corresponding in quantity and description to the cargoes were physically present. There is authority to the effect that an assured has no insurable interest in insuring property that it does not own although it might have a factual expectation of loss related to that property (Macaura v. Northern Assurance Co Ltd [1925] AC 619). However, a different stance has taken on the matter in other common law jurisdictions (in particular by the Supreme Court of Canada in Constitution Insurance Company of Canada v Ksmopoulos [1987] 1 SCR 2). Also, there is a marked shift in attitude of English courts towards a more flexible approach to insurable interest (especially in cases like National Oilwell Ltd v Davy Offshore (UI) Ltd [1993] 2 Lloyd’s Rep 582 and The Moonacre [1992] 2 Lloyd’s Rep 501). It should be at least arguable that a person who is led to believe by a fraudster to purchase goods (that never existed) and paid for them under a sale contract, should have an insurable interest if s/he enters into a contract of insurance to protect his/her interest against the risk of not getting what s/he paid for.

Late Payment Issue

The Insurance Act (IA) 2015 implies a term into insurance contracts to the effect that the insurer must pay any sums due in respect of a claim within a “reasonable time” (s. 13A of the IA 2015). However, by virtue of s. 13A(4) the insurer is not in breach of this implied term if it shows that there were reasonable grounds for disputing the claim merely by failing to pay while the dispute is continuing. The assured in the present case contended that the insurers’ conduct of the claim was “wholly unreasonable, and its investigations either unnecessary or unreasonably slow” and resulted the assured suffering losses by reference to the return on shareholders’ equity. Conversely, the insurers argued that a reasonable time was “a considerable time” and extended beyond the time by which proceedings were commenced. In any event, the insurers argued that by virtue of s. 13A(4) there was no breach of this implied term as they had reasonable grounds to dispute the claim.

Given that this was the first case on the matter, in considering whether there was any breach of the implied term, the judge apart from the guidance provided by s. 13A(2) of the Insurance Act, also turned to the Law Commissions’ Report and the Explanatory Notes to the legislation before ultimately deciding that there was no breach of the implied term. In reaching this conclusion, the judge made reference to a number of factors:

i) That although the case was relating to a dispute that arose in relation to a property insurance cover (which according to the Explanatory Notes such claims usually take less time to value than, for example, business interruption claims), the cover in question applied to transport and storage operations of different types and involving or potentially involving many different countries and locations, and claims under such a cover, could involve very various factual patterns and differing difficulties of investigation);
ii) The size of the claim was substantial;
iii) The fraud, uncertainty as to what happened, the destruction of documents, existence of legal proceedings in Ukraine and the fact that the assured elected to swap from French law to English law during the investigation were all significant complicating factors; and
iv) Relevant factors outside insurers’ control, included the destruction and unavailability of evidence and the legal proceedings in Ukraine.

On the point raised by the insurer, s. 13A(4) of the IA 2015, it was held that the insurer bears the burden of proof but here they had reasonable grounds for disputing the claim stressing that although the grounds for rejecting the claim were wrong, this did not mean that they were unreasonable. Although the judge considered elements of the insurers’ investigations were delayed, the investigations occurred in what was considered to be a reasonable time and they were part of the reasonable grounds for disputing the claim that existed throughout.

This is the first judgment on s. 13A of the IA 2015. When first introduced, there was some concern especially among insurers that this section might fuel US type of bad-faith litigation against insures. However, the parameters for such a claim are well-defined in s. 13(A) and guidance is provided to courts as to how they should judge whether a claim is paid/assessed within a reasonable time. The manner in which the trial judge made use of such guidance in this case is a clear indication that late payment claims will not go down the path that has been taken by some US courts and in England & Wales an assertion of late payment of an insurance claim will only be successful in some extreme cases. There is no doubt that insurers will take some comfort from the judgment given that it is clear now that an insurer’s decision to refuse payment for a claim will not automatically amount to breach of this implied term even if it is found that the grounds for disputing the claim are wrong.