Lloyd's Maritime and Commercial Law Quarterly
Financial loss due to buyers’ fraud—exploring cargo insurers’ liability
KS Vishwanath*
Comprehensive all-risk policies, such as one based on Institute Cargo Clauses-A (ICC-A), are usually seen by insurers as not covering claims for financial losses stemming from buyers’ non-payment of the invoice price. This position is based on the premise that non-payment is a financial loss arising from a “credit” risk as opposed to a “physical” loss from an insured peril. Upon delivery of goods to the warehouse of the “intended” buyer, the insurer considers the risk concluded. However, there is support for the view that fraudulent acquisition of goods by purported buyers constitutes fortuitous loss. Further, when fraud is premeditated, complex issues primarily concerning causation and the timing of the loss arise, as the plan is set in motion before the inception of the insured transit. Such claims have been reported globally, necessitating a closer evaluation of the scope and limitations of an all-risks marine cargo policy.
Introduction
The Institute Cargo Clauses-A (“ICC-A”), governed by English law and practice, obliges the assured to demonstrate that a loss has occurred due to an external fortuity. The threshold for proving this is relatively low, as the assured is not required to explain the precise cause of the loss. A loss is considered fortuitous unless it results from an excluded peril such as inherent vice, “wear and tear” or wilful misconduct of the assured. Once the assured establishes a fortuitous loss during the currency of the policy, the burden shifts to the insurer to prove that the loss falls outside the scope of the policy.1
However, complex legal issues arise when a financial loss occurs for one trading partner due to fraudulent conduct of the other, whether by the seller or buyer. These issues primarily concern questions of causation and whether such losses should be classified as a “credit” risk, distinct from “physical” loss, and whether a fraudulent scheme devised before the commencement of the insured voyage would preclude recovery under the policy.
The late Leslie Buglass2 took the position that a loss arising from fraud in a sales contract should be classified as a credit risk, a viewpoint seemingly shared by many insurers. However, this perspective may be overly broad. In the context of all-risks insurance policies, it is imperative to recognise that any loss resulting from a fortuity qualifies as
* Marine Insurance Consultant.
1. Ingersoll Milling Machine Co. v M/V Bodena (1987) 829 F 2d 293 (2d Cir), 308.
2. L Buglass, Marine Insurance and General Average in the United States, 3rd edn (Fort Lauderdale, 1991), 79.
302