Evolution of the Insufficiency of Packing Exclusion in Cargo Insurance
By Alan Jervis B.A. Hons., F.C.I.I., M.A.E. Chartered Insurer
Member of the Academy of Experts
Marine, Energy and Liability Insurance Expert Witness and Consultant
As with any discipline, an understanding of the historical development of a particular subject often brings clarity to current industry practices. Understanding the current insufficiency of packing exclusion in marine cargo insurance is no exception.
60 Year History
For those of you who joined the marine insurance industry in the past 10 years, you may only be familiar with the Institute Cargo Clauses A 1/1/2009. For those of you who have been in the industry since the mid 1980’s, you may have lived by the now less relied upon, but by no means obsolete Institute Cargo Clauses 1982. But there are a few of us – a rapidly shrinking group, including the writer – that worked in the era when the Institute Cargo Clauses 1963 dominated the London and other London wording based marine insurance markets.
There is a version of each of the 3 sets of the historical Institute Cargo Clauses that cover ‘all risks’ of loss or damage.
As it is often understood in industry custom and practice, in stark contrast to a named perils policy, under an ‘all risks’ policy, all that the insured must demonstrate to establish a recoverable claim is that the goods were shipped in good order and condition and that the loss or damage occurring was an unforeseen loss within the course of the insured transit. In practical terms, in the case of the latter point, it may even be sufficient that there is proof that the goods were damaged at the time of delivery at the destination named in the policy. (e.g. notations were made on the delivery receipt).
Once the insured has demonstrated loss or damage in transit, the onus of proof then shifts on the insurer to demonstrate the operation of a Policy exclusion.
The 1963, 1982 and 2009 Clauses all rely on an insufficiency of packing exclusion but in different ways and to varying degrees.
The 1963 Clauses did not contain terms that expressly addressed insufficiency of packing but underwriters from that era and beyond invariably repudiated claims due to insufficiency of packing.
The relevant provision in the 1963 Clauses was the All Risks Clause, Clause 5:
This insurance is against all risks of loss or damage to the subject-matter insured but shall in no case be deemed to extend to cover loss damage or expense proximately caused by delay or inherent vice or nature of the subject matter insured. Claims recoverable hereunder shall be payable irrespective of percentage. All Risks Clause, Clause 5:
Underwriters’ justification for denial under the 1963 Clauses could have been all or any of the following:
Insufficiency of packing was not a ‘risk.’ It was not a fortuity. It was inevitable
Insufficiency of packing was a form of inherent vice or nature of the subject-matter in that the proximate cause of the loss arose from within out and not from an external cause
Insufficiency of packing stemmed not from a transit loss but from circumstances created before the transit began and therefore before the insurance commenced.
A revision of the 1963 exclusions was arguably necessary for three reasons.
Firstly, the age of containerisation! This was an era in which containerised cargo and container vessels were becoming more and more popular yet this revolutionary innovation in shipping practices had not been fully addressed and adapted in the 1963 Clauses. The 70s also represented the openings to an age when packing protection was carried out by third party packers and consolidators but again, marine cargo insurance fell behind what was then considered modern shipping practices.
Secondly, and very much tied to the first reason, there was perhaps a sense of injustice that an insured was being denied payment of its claim due to bad packing in circumstances where the insured did not perform or even influence the packing. The packing was carried out by the suppliers or designated consolidators. In addition to reliance on the language of the exclusion, a possible rationale behind a denial was that the insured receiver of goods at destination could recover directly against its shipper overseas on the grounds that shortcomings in the packing constituted a breach in the contract of sale. In practice, and in many cases, the consignee had to absorb the loss even though the insufficiency in packing was not its fault.
Thirdly, if underwriters were commonly relying on the improper packing exclusion, then it was necessary to have a specific provision in the Clauses that would introduce more certainty to its application.
And so we move on to the 1982 Clauses……….
To address some of the insufficiencies and shortcomings of the 1963 Clauses, a provision was introduced in the 1982 Clauses that sought to clarify when claims due to poor or inadequate packing would be excluded. The 1982 Clauses also sought to address situations involving improper stowage of the carrying container, thus adapting the exclusionary language to shipping practices of the day.
- 4. In no case shall this insurance cover:
4.3 loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured (for the purpose of this Clause 4.3 ‘packing” shall be deemed to include stowage in a container or liftvan but only when such stowage is carried out prior to attachment of this insurance or by the Assured or their servants)
Unfortunately, the 1982 clauses still excluded insufficiency of packing or preparation even when it was beyond the control of the assured and arose fortuitously after the insurance had attached. It was considered that this part of the clause should be reformed and was a risk that should be acceptable to insurers and an innocent insured would expect it to be covered.
Under the 2009 Clauses, this is now covered as packing by third party packers during the currency of the insured transit.
Hence, the exclusion under the 2009 Clauses is limited to cases where the assured or their employees are directly responsible for the poor packing or preparation, irrespective of when it was carried out.
The 2009 Clauses also clarify a standard by which the insufficiency or unsuitability is to be judged in that the packing or preparation must be sufficient ‘to withstand the ordinary incidents of the insured transit.’
4.3 loss damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject-matter insured to withstand the ordinary incidents of the insured transit where such packing or preparation is carried out by the Assured or their employees or prior to the attachment of this insurance (for the purpose of these Clauses ‘packing’ shall be deemed to include stowage in a container and ‘employees’ shall not include independent contractors)
For questions, Alan can be reached at firstname.lastname@example.org