Engelhart CTP (US) LLC v Lloyd's Syndicate 1221 for the 2014 Year of Account & 6 Ors

Factual and Procedural Background

This case concerns a construction summons under Part 8 of the Civil Procedure Rules regarding the interpretation of a marine cargo insurance policy dated 1 December 2014 ("the policy") between the Plaintiff assured and the Defendant insurers. The policy operates on an open cover basis for various commodities, including metals. The Plaintiff claimed under the policy after containers purportedly containing copper ingots were found to contain only slag of nominal value, with the assumption that no copper was ever shipped and that the Plaintiff, in good faith, had accepted fraudulent bills of lading and other shipping documents.

The Plaintiff, part of a large trading group and previously known under a different name, settled claims with other insurers but the Defendant insurers, members of Lloyd's of London, refused the claim. The Plaintiff’s claim was that the loss fell within the broad All Risks cover of the policy, while the Defendants contended that the policy did not cover losses arising from acceptance of fraudulent documents for non-existent cargo.

Agreed facts include the Plaintiff’s purchase and sale of copper ingots on CIF China terms, with the first shipment delivered without issue. Subsequent shipments involved documents for 1,967.898 metric tonnes of copper said to be shipped in containers from New York, but upon arrival in Hong Kong, the containers were found leaking and contained only slag. The Plaintiff was unaware of the fraud at shipment and paid the seller, while the buyer refused payment. The Plaintiff’s claim under the policy was refused by the Defendant insurers.

The policy is a Marine Cargo and Storage Insurance covering transit by any means worldwide, with broad operative and commodity-specific conditions, including coverage extensions and clauses addressing concealed damage, container shortages, and fraudulent documents.

Legal Issues Presented

1. Whether the Plaintiff’s loss, arising from acceptance of fraudulent shipping documents for non-existent cargo, falls within the scope of the All Risks cover provided by the marine cargo insurance policy.
2. How to construe the specific policy clauses, particularly the Container clause and the Fraudulent Documents clause, in the context of the assumed facts.
3. Whether the policy covers physical loss of goods only or extends to economic losses resulting from fraudulent documents relating to non-existent goods.

Arguments of the Parties

Plaintiff's Arguments

• The policy provides All Risks cover of the broadest kind, extending beyond standard entry-level All Risks policies.
• The policy’s commercial matrix and broad wording, including open cover and commodity-specific clauses, support coverage of losses from acceptance of fraudulent documents for non-existent goods.
• The Container clause obliges insurers to pay for shortages of contents even if container seals appear intact, covering total shortages including non-existent cargo.
• The term "shortage" in the Container clause should be interpreted broadly to include 100% shortages and paper losses.
• The Fraudulent Documents clause, by its title and wording, covers physical loss of goods caused through acceptance of fraudulent documents, entitling the Plaintiff to claim for loss of non-existent goods represented by fraudulent documents.
• Reliance on Chemical Bank v Affiliated FM Insurance Company supports coverage for losses due to fraudulent documents, distinguishing it from other cases involving purely economic loss.

Defendant's Arguments

• The policy covers physical loss of or damage to goods, and no copper ingots were ever shipped, so no physical loss occurred.
• The Plaintiff’s losses are economic losses arising from acceptance of fraudulent documents, which are not covered under the policy.
• The Container clause’s reference to "shortage" should be given its ordinary meaning, requiring a difference between shipped and delivered goods, not covering total absence of goods.
• The Fraudulent Documents clause requires a physical loss of goods and does not extend coverage to losses from fraudulent documents relating to non-existent cargo.
• Precedents such as Coven SpA v Hong Kong Chinese Insurance Co and Fuerst Day Lawson Ltd v Orion Insurance Co Ltd establish that all risks marine cargo policies do not cover paper losses or losses of non-existent goods without clear wording.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by affirming the established legal principle that marine cargo all risks policies are generally construed to cover physical loss of or damage to goods, not economic or paper losses. It emphasized that for coverage of losses arising from non-existent goods or fraudulent documents, clear and unambiguous wording is required.

Applying this to the facts, the court found that since no copper ingots were ever shipped, there was no physical cargo to be lost or damaged. Accordingly, the Plaintiff’s losses were economic losses resulting from acceptance of fraudulent documents, which the policy does not cover.

The court analyzed the Container clause and rejected the Plaintiff’s broad interpretation. It held that "shortage of contents" must be understood in its ordinary meaning as a difference between shipped and delivered goods, not covering total absence of goods where none existed. The phrase "notwithstanding that seals may appear intact" was interpreted as allowing for proof of physical shortage despite intact seals, not extending coverage to paper losses.

Regarding the Fraudulent Documents clause, the court distinguished it from the clause in Chemical Bank v Affiliated FM Insurance Company by highlighting the presence of the word "physical" in the current policy, which limits coverage to physical loss of goods. The court found no basis to extend coverage to economic loss from fraudulent documents for non-existent goods.

The court also considered the broader policy context, noting that while the policy was broader than a standard Institute Cargo Clauses policy, it did not displace the presumption that coverage is limited to physical loss or damage. The court rejected the Plaintiff’s submission that the policy’s broad wording and commercial context supported coverage for non-physical loss.

Holding and Implications

The court held that the Plaintiff is not entitled to the declaration sought that the policy covers the loss arising from acceptance of fraudulent documents for non-existent cargo.

The direct effect is that the Defendant insurers are not liable under the policy for the Plaintiff’s claimed losses. The decision confirms the principle that marine cargo all risks insurance policies are limited to physical loss or damage to goods, and do not cover economic or paper losses absent clear and explicit wording. No new precedent was set beyond reaffirmation of established legal principles.