This article was first published in Insurance Day on 10 May 2018. 

Engelhart CTP (US) LLC v Lloyd’s Syndicate 1221 [2018] EWHC 900 (Comm)

The Commercial Court provides a timely reminder that an insurance policy on goods will only cover physical loss and damage unless clear words are used to extend cover.

The facts of the case

In Engelhart CTP (US) LLC v Lloyd’s Syndicate 1221 [2018] EWHC 900 (Comm), the Court was asked to consider the proper meaning of an ‘all risks’ marine cargo carriage and storage policy.  The Insured claimed that they had suffered losses when containers believed to contain a shipment of 2,000 MT of copper ingots turned out to contain only slag.  Although the circumstances in which only slag came to be in the containers was not agreed between the Insured and the Insurers, the parties agreed certain facts on which the Court was asked to decide the construction of the policy under CPR Part 8.  The assumed facts were that no cargo of copper ingots ever existed and the Insured suffered loss because it paid for and accepted fraudulent bills of lading under a CIF sale contract in the mistaken belief that the bills of lading were genuine.

The policy was very broad and reflected the Insured’s status as a large trading group dealing in a range of goods including oil products, coffee, sugar, metals and vegetable oils.  The Insurers provided cover on Institute Cargo Clauses ‘all risks’ terms with a series of bespoke clauses widening the coverage, including the following two clauses:

“Container Clause.  It is agreed that this Insurance contract is also to pay for shortage of contents (meaning thereby the difference between the number of packages as per shippers and/or suppliers invoice and/or packing list loaded or alleged to have been laden in the container and/or trailer and/or vehicle load and the count of packages removed therefrom by the Assured and / or their agent at time of container emptying) notwithstanding that seals may appear intact, and/or any other loss and/or damage including but not limited to cargo and/or container sweat howsoever arising.

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

The Court’s decision

The Insured argued that the policy extended to cover paper losses.  The Insured also contended it could bring itself within these clauses to recover its losses resulting from the acceptance of fraudulent bills of lading.  In particular, the Container Clause defined shortage of contents to include paper losses resulting from a difference between the packages alleged to be loaded and the packages actually discharged and provided for cover in the case of loss resulting from fraudulent shipping documents.

The case came before Sir Ross Cranston in the Commercial Court, who noted that policies on goods ordinarily covered only physical loss, whereas the loss complained of here was a paper loss because “something must exist to be physically lost”.  Following Coven SpA v Hong Kong Insurance Co [1999] Lloyd’s Rep. IR 564, the Judge held that clear words were necessary to extend a policy on goods to cover paper losses and that there were no such words in the policy.

The two clauses principally relied upon by the Insured did not have that effect.  The Container Clause was concerned with a shortage of contents, which ordinarily meant a difference between what was loaded and what was discharged.  The words in brackets were subsidiary and did not transform the cover into one for paper losses.  The Fraudulent Documents Clause did not apply either.  The Insured’s argument faced what the Judge considered to be an insuperable difficulty that only physical loss was covered and, on the agreed facts, the Insured had not suffered any physical losses.

Implications of the Court’s decision

The decision in Engelhart is a timely reminder that a policy on goods will only respond to physical loss or damage to the subject matter insured unless the parties clearly express their intention to cover financial losses that do not result from physical loss or damage.

The Court will take a narrow view of ‘physical loss’.  The Judge disagreed with the Insured’s argument that it had suffered a physical loss in this case because it had paid for documents of title containing fraudulent statements, but received no goods.  Physical loss meant that the goods previously existed and no longer existed.  Therefore the rule is not limited to fraudulent documents and will apply equally to measurement errors and other innocent mistakes in paperwork.

The decision also shows that it will not be good enough for the insured to argue that the intent behind the policy was to give very broad coverage.  The policy was on ‘all risks’ terms and extended cover in a range of ways so that the Insured could rightly argue that there were very wide terms to cover losses that were fortuitous.  Even in that context, the starting point is that losses flowing from the acceptance of inaccurate or fraudulent documents will not be covered by a policy on goods, even though a genuine and often (as in this case) substantial financial loss has been suffered.

This was a marine cargo insurance policy.  However, there is no reason to think that the Court’s approach in Engelhart and the earlier case of Coven is limited to marine insurance.  The assumption is that polices covering goods are not intended to cover the financial consequences of the goods not existing unless this is spelled out by the parties.  That assumption holds good for non-marine insurance as it does to marine insurance.  This can be seen, for example, in Outokumpu Stainless Ltd v AXA Global Risks (UK) Ltd, where the financial consequences of disposing of radioactive slag was not covered by an ‘all risks’ policy in respect of a steelworks.

Therefore this case provides an opportunity for parties to revisit policies on goods to see whether the broad coverage provided by ‘all risks’ terms covers financial losses resulting from the acceptance of fraudulent documents, measurement errors and other mistakes in documents.  In the absence of clear words, they are unlikely to do so.

Luke Parsons QC and Ben Gardner of Quadrant Chambers acted on behalf of the insurers, instructed by Mark Lloyd and Andrew Yarwood, Kennedys Law LLP.