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Clause 5.6 of Institute Container Clauses, Time 1/1/87

Author: M Jagannath
Date: July 12, 2014

This article focuses on Clause 5.6 of Institute Container Clauses, Time 1/1/87 and its effect. It also discusses ways to manage the risks which are uninsured due to this exclusion.

 

  1. This article focuses on Clause 5.6 of the Institute Container Clauses, Time 1/1/87 and touches on the judgement of Integrated Container Services Ltd (“ICS”) v British Traders Insurance Co Ltd (“BT”),1 and which could have been the reason why Clause 5.6 of the Institute Container Clauses, Time 1/1/87 and Clause 4.6 of the Institute Cargo Clauses, 1/1/82 were incorporated into the policies as such. This article will then touch on the effect of this specific clause (Cl 5.6 of ICC, Time 1/1/87) and which states “In no case shall this insurance cover loss damage or expense arising from insolvency or financial default”.

 

  1. The Institute Container Clauses, Time 1/1/87 is widely used for insurance of containers and are available in two forms – one on full conditions, and the other covering only total loss, general average, salvage, salvage charges and sue and labour. While there are bespoke policies available in the market covering containers, we understand that most of the policies incorporate a similar clause in their wordings and therefore the effect would be the same in those policies.

 

  1. In ICS v BT, a decision of the English Court of Appeal, container owners who were lessors recovered substantial expenses incurred under the Sue and Labour Clause so as to secure release of their containers from their lessees who had gone insolvent. By way of a summary, ICS were covered under an “All Risks” policy of BT for the period (from 01 Jan -31 Dec 1975) for their containers and some of which was leased to an operator, Oyama Shipping Co. Ltd (“Oyama”). In 1975, Oyama was found to be insolvent and ceased trading and effectively abandoned the containers to their agents, terminals or depots as the case may be. ICS expended substantial monies to recover the containers from the various locations, and in turn, sought recovery under the Sue and Labour clause. As this was an “All Risks” policy the Court held that ICS were entitled to recover the charges expended from the Insurers.

 

  1. As you will note, the judgement of ICS v BT predates both Institute Cargo Clauses 1/1/82 and the Institute Container Clauses, Time 1/1/87. Cl 5.6 of Institute Container Clauses, Time 1/1/87 states “In no case shall this insurance cover loss damage or expense arising from insolvency or financial default”. We will touch on the words which are underlined above to see the effect of this clause.

    1. loss damage: This expression comprehends all physical loss and damage to the containers. It does not appear to include any financial loss unaccompanied by any physical loss or damage to the containers such as loss in the value of the containers even though this may have been caused by one of the perils insured against (In an “All Risks” policy,  cover is provided for any loss or damage occasioned fortuitously, but not those which occur inevitably – see Gaunt v British & Foreign Marine Insurance Co Ltd.2)

    2. expense: money’s spent on something.

    3. arising from: suggests a broad causal connection would be sufficient to trigger this clause.

    4. Insolvency or financial default: A person is said to be insolvent when he is unable to pay all his debts in full. It has been suggested that in the context of this clause, “insolvency" would appear to be wider than “financial default” and may include the situation in which many operators may continue to trade even though they are not a going concern.3

  1. The corresponding clause 4.6 of the Institute Cargo Clauses 1/1/82 states as follows: “loss damage or expense arising from insolvency or financial default of the owners managers charterers or operators of the vessel.”. The wordings closely mirror clause 5.6 of Institute Container Clauses, Time 1/1/87 and therefore the effect of this clause would be similar to that of Institute Container Clauses Time, 1/1/87 (As the Institute Cargo Clauses 1/1/82 predates the Institute Container Clauses, Time 1/1/87, it would actually be correct to say that the Institute Container Clauses Time, 1/1/87 mirror the Institute Cargo Clauses 1/1/82 and not the other way round)

  1. It therefore appears to us that wordings of both the Institute Cargo Clauses 1/1/82 and the Institute Container Clauses, Time 1/1/87 were drafted in such a way so to avoid such losses (which would have been covered under an “All Risks” policy). Due to the representation made by the cargo interests to the underwriters, draftsmen by changing the wordings in Institute Cargo Clauses 1/1/09, have been able to ameliorate the effect of the earlier clause. The wordings of Clause 4.6 of Institute Cargo Clauses 1/1/09 states “loss damage or expense caused by insolvency or financial default of the owners managers charterers or operators of the vessel, where at the time of loading of the subject-matter insured on board the vessel, the Assured are aware, or in the ordinary course of business should be aware, that such insolvency or financial default could prevent the normal prosecution of the voyage. This exclusion shall not apply where the contract of insurance has been assigned to the party claiming hereunder who has brought or agreed to buy the subject-matter insured in good faith under a binding contract.”

    In order for the exclusion to act, the Insured should have been aware of the possibility of default by the Owners or Operators due to insolvency or financial default either at the time of loading or when the contract was assigned to them. The Insured would therefore be spared of consequences when they have no knowledge on the financial position of the Owners or Operators.

  1. In view of the exclusion under Cl 5.6 of Institute Container Clauses, Time 1/1/87, Container Owners should be aware that they may be without cover for any loss which may occur due to the insolvency or financial default of their clients (container lessee, cargo interests who have not taken delivery / returned containers, etc). In order to avoid this, Container Owners could consider the following:

    1. Risk Management Process which include conducting a regular KYC (Know Your Customer) to ascertain their risks and take measures to limit their exposure.

    2. Other Insurance covers: We understand that Container Owners acting as Lessors could take cover for “default insurance” i.e. the policy would only trigger if the Lessee fails to make payment say after 6 months of due date, or the Lessee becomes insolvent, etc. This is a specialized type of policy and not many Insurers provide this cover. Even if cover is provided, considering the exposure, the Insurers may impose high deductibles to limit their exposure. We further understand while the Marine Insurance market is not significantly involved in this product, some Insurance Brokers have been able to arrange a similar product familiar to financiers and directly related to the Lessors actual receivables. We must however confess that although we have been able to find literature on these type of covers, we are yet to sight the wordings and would be grateful for the assistance from the readers should they have the wordings readily available.

  1. In conclusion, Container Owners should be aware of the exclusions under Cl 5.6 of  the Institute Container Clauses, Time 1/1/87 policy and that if this is a significant risk to their business, they should consider additional risk management process / insurance covers to obviate these risks.

 


 

1[1981] 2 Lloyd’s Rep 460; [1984] 1 Lloyd’s Rep 154.

2(1921) 26 Com Cas 247.

3 N Geoffrey Hudson, Tim Madge & Keith Sturges (eds), Marine Insurance Clauses, 5th Edition (informa 2012) page 22.

 

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