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Dubai Cassation Court upholds insurers' coverage defence to marine claim

News / / Dubai

The background facts

Insurers issued a marine insurance cargo policy for a cargo of 30,000 MT of direct reduced iron (“DRI”) to be carried from Iran to China. The policy stated that it was in respect of cargo carried from Shahid Rajaee Port or Bandar Abbas, Iran to Shanghai, China. The insured value was around AED 53m. The policy incorporated the Institute Cargo Clauses A.

The vessel sailed from Bandar Abbas on 16 June 2011 and arrived at Zhangjiagang port, China, on 23 July 2011, commencing discharge operations. Zhangjiagang port is approximately 150km north of Shanghai port and no notice of the change of discharge port was given to insurers prior to the vessel arriving in Chinese waters.

Discharge of the DRI was completed late on 28 July 2011 and heavy rainfall was recorded in the early hours of that day. The contemporaneous evidence showed that although the vessel’s covers were closed during this downpour, nonetheless a significant quantity of the DRI was exposed to the rain. The DRI was also loaded on to truck beds that had become damp following the rainfall. In certain conditions, DRI can oxidise at such a rate that an exothermic reaction (i.e. one that gives off heat) occurs and hydrogen is produced. In certain instances, it is possible for this reaction to produce a highly explosive mix. The rain in this instance led to such explosive conditions and the DRI was damaged. The receiver took no steps to segregate the damaged cargo from the sound and a significant quantity of DRI was stored in an open storage yard. The insured brought a claim under the policy for damage to 80% of the DRI (AED 36m).

Legal issues

Clause 10 of the Institute Cargo Clauses provides for cargo to be held covered at an additional premium when the destination of a voyage is changed, subject to insurers being given prompt notice.  Article 380(2) the UAE Maritime Code effectively provides that where the insured changes the insured voyage without notice to insurers, insurers are not liable for any losses that occur outside of the agreed voyage.

The insured asserted that the policy provided cover from the time the DRI left the warehouse in Bandar Abbas until it was delivered to the final warehouse in China and that the insured peril operated before the DRI was delivered to the final warehouse. The insured contended that it was not the charterer of the vessel and that accordingly, it had no knowledge of the change of disport. The upshot of this, it was said, prevented the insured from giving the notice to the insurers of the change of voyage.

Insurers asserted that the insured’s failure to give “prompt notice” of the change of port allowed them to deny cover and avoid liability for the claim. Insurers also argued that the charterers of the vessel were the insured and/or their agents, that the loss occurred in Zhangjiagang port (a river port which has very different characteristics to Shanghai port), such that pursuant to Article 380 of the Maritime Code, insurers were not liable for any loss that occurred in Zhangjiagang port. Insurers further argued that the insured/receivers materially contributed to the loss in failing to handle and store the DRI in accordance with industry standards.

After a visit by the court appointed expert to the relevant locations in China, the final expert report at the Court of Appeal stage concluded that the insured had given the order for the vessel to deviate from Shanghai to Zhangjiagang, that insufficient steps had been taken to protect the DRI from damage and that once damaged, the insured/receivers materially contributed to the loss in failing to dry the damp DRI, properly store all the DRI and to segregate the sound DRI from the damaged. The Court of Appeal endorsed the expert report and found in favour of insurers and that decision was upheld by the Court of Cassation.

In reaching its conclusion, the Court of Cassation agreed that the decision to sail to Zhangjiagang was a voluntary one taken by the insured, and that the failure to give notice of the change of the discharge port meant that the insurer was not liable for any losses which occurred outside the original voyage as stated in the policy.

Comment

This is a recent example of a judgment handed down by the Dubai Court of Cassation in which an insurer has been able to decline cover on the basis of a breach of an incorporated set of standard terms and conditions. It is encouraging that, in this case the Court moved away from a position where a claim is accepted without scrutiny, or in ignorance of policy terms.

Whilst there is no legal principle of precedent in the UAE, this judgment is an encouraging development and it is hoped that it will have persuasive value in similar cases heard in the UAE local courts.

* This article first appeared in Marasi News and can be viewed here.

Khalid Hamed

Khalid Hamed Partner

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