Insurable Interest – When is a Proprietary Interest in Goods Not Required?

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By Maurice Lynch, Partner, and Morgan Sudweeks, Paralegal

In the context of marine insurance policies an insurable interest is an essential component of being entitled to make a claim under the insurance policy issued. Without one, an insurer is not required to indemnify an assured.

In the context of a policy of insurance covered by the Insurance Contracts Act 1984 (Cth), an insurable interest is not required, and it is sufficient that an assured has suffered a pecuniary or economic loss by reason that the subject matter has been damaged or destroyed.

In the context of a marine insurance policy, the recent decision of Quadra Commodities SA v XL Insurance Company SE & Ors [2023] EWCA Civ 432 has clarified whether an insurable interest can arise in unascertained goods where property has not passed to the assured, and when part payment of the goods has only been made. In these circumstances it an insurable interest can arise.

Facts

Quadra, a trader of agricultural commodities, was an assured under a marine cargo open policy for grain that they purchased and declared during the period of insurance. The policy expressly provided cover for:

  • loss or damage to goods through the acceptance by the assured of fraudulent shipping documents; and
  • directly caused by misappropriation.

Quadra entered a series of contracts for the purchase of grain with companies within the Agroinvest Group.

Quadra, under one of the contracts agreed to pay 80% of the purchase price of a consignment of gran against receipt by it of warehouse receipts, with the balance of the purchase price payable upon receipt of shipping documents.

Warehouse receipts were provided to Quadra by Agroinvest and confirmed the goods in question were being held in storage in the Ukraine. Inspections as to the condition and existence of the goods were carried out by Quadra and confirmed the good’s existence. The cargo was declared to insurers.

In February 2019, a fraud in the Agroinvest Group was exposed where goods stored in the warehouses in Ukraine were routinely sold and refinanced multiple times using fraudulent warehouse receipts. Quadra’s goods were amongst those subject to such a scheme and were misappropriated. The scheme resulted in Quadra’s goods disappearing from the warehouse in which they were stored.

Quadra claimed on its marine insurance policy in relation to several cargos the subject of the scheme. In response insurers denied liability on the basis that Quadra did not have an insurable interest in any goods because the goods it purchased never existed. They further denied liability on the basis that the loss was financial (80% of the purchase price paid) rather than physical. If the policy was subject to the Insurance Contracts Act 1984 (Cth), such arguments would not have been able to have been made by insurers, and the issue would not have arisen.

Decision

The Court confirmed that Quadra had an insurable interest in the goods in question despite neither property nor risk in the goods passing to it by reason of:

  1. its part payment of the contract price for the goods because if the goods were lost or damaged and the seller was insolvent, the buyer might not be able to recover the money which he had paid for them; and
  2. its rights to an immediate possession of the goods under Ukrainian law pursuant to the storage agreement under which they were being stored.

Importantly the Court found that it did not matter that the goods which Quadra had purchased, and were the subject of the fraud, were being stored in bulk.

Comment

There is a trend of Courts to find an insurable interest.

The decision confirms that the buyer of unascertained goods can have an insurable interest even where title and/or property interests have not passed, so long as payment or part-payment has been made. This stands true regardless of the goods forming part of an identified or unidentified bulk or where there has been a fraud. However, the Court emphasised that an insurable interest can only be discerned by looking at all surrounding circumstances and whether the contract of insurance embraces the insurable interest intended to be covered is a question of construction.

A consequence of the decision means that where multiple assureds can evidence payment for the same commodities that have been oversold, insurers may have to pay several indemnities in respect of the same goods. Accordingly, policy wordings may need to amended to take away this unintended consequence.

For further information, please do not hesitate to contact us.

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