Engelhart CTP (US) LLC v. Lloyd’s Syndicate 1221 and Others  EWHC 900 (Comm)
The Commercial Court has considered the economic losses issue in the context of an all risks cargo insurance policy. The policy described as “Marine Cargo and Storage Insurance” was between the claimant assured and the defendant insurers, and operated on an open cover basis in relation to a range of commodities, including certain metals.
The claimant bought copper ingots and re-sold them the same day. However, when some of the containers arrived for transhipment, it was discovered that they contained only slag of nominal value. It was assumed for the purposes of the policy construction summons that no copper was ever shipped and that the claimant had, in good faith, paid for and taken up fraudulent bills of lading and other shipping documents. The claimant sought an indemnity under its All Risks marine cargo insurance policy and some of the insurers denied liability on the basis that the loss did not fall within the scope of the policy cover.
The policy included various sections setting out specific insuring conditions for the commodities insured including oil products, coffee, sugar, metals and vegetable oils, and had the following opening clause: "It is noted and agreed that unless otherwise declared to the contrary, the broadest coverage shall apply."
The policy also included specific clauses, in particular a “Container Clause”, covering shortage of contents notwithstanding apparently intact seals; and a “Fraudulent Documents” clause, covering physical loss of or damage to goods through the acceptance of fraudulent documents of title, including bills of lading and warehouse receipts.
The claimant argued that the policy extended to cover paper losses. The claimant also attempted to bring itself within these clauses to recover its losses resulting from the acceptance of fraudulent bills of lading.
The Court rejected the claimant’s claim and held that the loss was not covered under the policy. The Judge noted that prior case law required as a starting position that the purpose of an All Risks marine cargo policy is to cover loss of, or damage to, property. He also noted the distinction between physical loss of existing cargo and a paper loss of non-existent cargo. The Judge held that “shortage” has its ordinary meaning and cannot cover a situation where there were no goods in the first place.
The Court accepted that the claimant’s alleged losses were economic losses due to the acceptance of fraudulent documents in the expectation that they covered physical goods. Since an all risks marine cargo policy is generally construed as covering only losses flowing from physical loss or damage to goods, there must be clear words indicating a broader intention.
The Judge held that physical loss of or damage to goods are plain words, and should be given their natural meaning. They do not encompass economic loss resulting from the acceptance of fraudulent bills of lading in respect of a non-existent cargo.
The decision is a reminder of the well-established principle that all risks policies cover only physical loss of or damage to the goods insured and do not extend to financial or paper losses unless clear words are used.
It is interesting to note the Court’s narrow construction of ‘physical loss’. The Judge disagreed with the assured’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. Therefore the rule is not limited to fraudulent documents and will apply equally to measurement errors and other innocent mistakes in paperwork.
The phrase "the broadest coverage shall apply" in the insuring conditions opening clause meant only that the broader of the operative conditions and the commodity-specific conditions applied, nor did any of the specific clauses provide cover for paper losses and fictitious goods even though the policy was very much broader than the Institute's all risks policy.