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High Court assesses insurable interest principle and late payment damages claim

News / / London

Quadra Commodities SA v XL Insurance Company SE & Ors [2022] EWHC 431 (Comm)
This recent High Court case deals with a claim arising from the “Agroinvestgroup Fraud” which affected the Ukrainian agribusiness in early 2019. It provides useful guidance on the interpretation of all-risks cargo policies and, for the first time, how the Courts will treat claims for late payment damages under section 13A of the Insurance Act 2015.

The background

The Claimant insured (“Quadra”) was a commodities trader involved in shipments of grains, seeds and oils. In 2016, it took out an open marine cargo policy against which it declared shipments it purchased. The policy was renewed on 1 October 2017 and then again on 1 October 2018. It was an all-risks cover on the ICC “A” clauses covering storage and transit risks.

The case concerned cargoes which Quadra purchased from Agroinvest companies and which were stored at three Agroinvest sites in Ukraine. In none of the cases did Quadra see the cargoes prior to purchase. The “purchases” were evidenced by warehouse receipts provided by the three storage elevators.

Quadra instructed an inspection company called Bastico to conduct monthly stock monitoring at each of the sites. This involved an inspection of the warehouse documents and a visual inspection of the stock.

Between October 2018 and January 2019, Bastico issued a number of reports confirming the presence of goods stored for Quadra corresponding to their warehouse receipts at a facilities in Zaplazsky, Bilgorod and Izmail.

Unbeknownst to Quadra, the transactions were in fact part of an elaborate fraud; a type of Ponzi-scheme whereby the Agroinvest companies would purchase grain, corn and sunflower seeds from local farmers and then store them in the elevator sites. Parcels of the commodities were then sold to multiple traders by the issuance of fraudulent warehouse receipts. Following the uncovering of the fraud it became apparent that the same parcels of goods had been sold many times over.

Up to January 2019, Agroinvest were able to provide physical deliveries of goods when required, but by late January 2019, the demand became too great and they were unable to provide sufficient goods. On 30 January 2019, Bastico were unable to gain access to any of the sites and subsequently the fraud was uncovered. Those responsible fled having destroyed most of the documentary evidence. With the exception of some deliveries authorised by the Ukrainian Court after discovery of the fraud, Quadra suffered significant losses due to the fraud.

The claim

On 14 February 2019, Quadra notified its lead insurers, XL, that it intended to claim on its policy. Following investigations by insurers, the claim was declined. A claim form was then issued on 20 May 2020.

Quadra claimed that the basis of the insurance was the adventure consisting of the successful storage, transport and delivery of the goods. In the alternative, they claimed it was the goods themselves. They sought indemnity for: the market value of the goods; sue and labour expenses; and damages under section 13A of the Insurance Act for late payment by the insurers.

Insurers argued that there was no loss of physical property, and that Quadra's loss was a purely financial loss which was not insured. They specifically denied that two Zaplasky cargoes, and all the Izmail cargoes existed because at the times they were supposed to have been delivered to the sites, the sites were already at or near maximum capacity. Insurers therefore denied that Quadra had any insurable interest in the subject matter insured and there was no misappropriation of any goods which were covered by the policy. In any event, the burden of proof was on the insured to show that they had an insurable interest.

It was common ground in the claim that a fraud had been perpetrated and that Quadra was an innocent victim of that fraud.  

The findings

Mr. Justice Butcher agreed that Quadra had the burden of proving their insurable interest. Also, the basis of the insurance was the property itself rather than the adventure and to support his conclusion he pointed to numerous references to the “cargo” or the “property” in the policy documents.

On its alternative case, Quadra argued that physical goods had been present but had been lost, and on this point the Judge agreed with them. He considered that the combined effect of the warehouse receipts, the Bastico reports and the physical delivery of some of the cargo showed that on the balance of probabilities the goods evidenced in the receipts were physically present.

The Judge accepted Quadra’s contention that they had an insurable interest. The goods were stored for Quadra as part of their business and they would be prejudiced by their loss. This was unaffected by the fact the goods were unascertained and might be stored with goods belonging to others, or that property and risk might not have passed to Quadra.

It was held that there was a loss by misappropriation. In addition to the all-risks cover the policy included a misappropriation clause which the judge considered the loss fell squarely within. There was an actual total loss by reason of a peril insured against.

There was no loss under a “Fraudulent Documents Clause” because the physical loss of the goods was not caused by the fraudulent warehouse receipts.

The indemnity was the market value of the goods and the insured was allowed to recover its sue and labour expenses.

Section 13A Insurance Act 2015

An interesting post-script to the main action was the insured’s claim for late payment damages under the Insurance Act. This involved the Court considering the wording of section 13A and the grounds and period for which insurers might reasonably withhold payment of indemnity.

Mr. Justice Butcher held that a reasonable time for the insurers to have investigated the claim was for one year from the Notice of Loss. However, he also found that although they were ultimately wrong to contest the claim, insurers were not acting unreasonably when they did so. This was a situation which had been explicitly anticipated by the law commission report on which section 13A was based. Accordingly, there was no breach of section 13A by insurers.

Discussion

The case provides useful guidance on how the Court is likely to treat cargo fraudulent claims involving unascertained goods, where there is a good deal of evidence to point to actual existence of the goods.

With regard to late payment damages claim, the indication from the case is that unless insureds have very strong claims which are likely to succeed on a summary judgment application insurers are likely to be able to defend section 13A claims as long as they act reasonably. There was criticism of the speed of insurers’ investigation before declining the claim and the suggestion from the Judge was that had the insurers’ investigation gone on significantly beyond a year that might have been held unreasonable and grounds for an award of damages.

Tony McDonach

Tony McDonach Managing Associate

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