Excellent take-up of 2017 misappropriation exclusion and inclusion clauses

The Joint Cargo Misappropriation Exclusion and Inclusion Clauses introduced in 2017 to combat the common occurrence of poor monitoring have, after initial scepticism gained in popularity and are now in widespread use, a Lloyd’s of London presentation heard yesterday, February 7th.

John Minton, CEO of Consulting Scientists and Engineers Milton, Treharne and Davies, was joined by Mike Roderick, partner at Clyde & Co, with Nick Derrick, Cargo Class Underwriter at Standard Syndicate, in the chair.

John Minton provided a list of misappropriation scams that added up to more than $7bn in today’s values in the past 60 years – although one of them, the Great Salad Oil Swindle of 1963, contributed about $3bn of this in current money.

Minton noted that removing such large volumes could never be done quickly, and most large misappropriations had taken place over a period of more than a year.

This eventually led to an exclusion clause – JC2017-010:

  • In no case shall this insurance cover loss or damage arising from misappropriation. Misappropriation shall in this insurance be deemed to mean the unauthorised conversion use release or disposal of the subject-matter insured at or from a warehouse or other place of storage whether on or offshore, other than in the ordinary course of transit, by or with the knowledge of the bailee or of any other person or entity including their officers and employees to whom the subject-matter insured has been entrusted.

However, there was client demand for some kind of misappropriation cover. This led to an inclusion clause.

  • Subject always to the other limitations and exceptions of this insurance, this insurance covers loss or damage arising from misappropriation provided always that the loss or damage occurs not more than 45 days prior to the date of its notification to underwriters.

Misappropriation shall in this insurance be deemed to mean the unauthorised conversion use release or disposal of the subject-matter insured at or from a warehouse or other place of storage whether on or offshore, other than in the ordinary course of transit, by or with the knowledge of the bailee or of any other person or entity including their officers and employees to whom the subject-matter insured has been entrusted.

Cover for misappropriation shall in any event be subject to an annual aggregate limit as stated in the Schedule to this insurance.

Mike Roderick provided a legal context to this, pointing out that, while theft is an all-risks peril within ICC(A) cover, it was not so under the Marine Insurance Act 1906.

  • The term “thieves” does not cover clandestine theft or a theft committed by any one of the ship’s company, whether crew or passengers.

Therefore there was an all-risks cover for a theft or series of theft that spanned policy years. A definition of misappropriation was needed in the clause because there is no generally accepted legal definition of the term.

The basis of the exclusion came from what is known as the American jewellers’ block exclusion in the specie market, partly because this had functioned for many years without much controversy.

But what caused interest with the audience was the inclusion clause, which restricts liability to loss or damage that occurred 45 days or less before the underwriters were notified.

Minton said that he had argued for a 30-day limit, as inventories should be properly checked every 30 days. However, he said that he was persuaded by the committee to allow an additional 15 days for reporting. He estimated that, if one took an average length of time of a crime as being about a year (although this he admitted was probably an underestimate) and if one accepted that the theft would be pro rata month after month, then in that case the average payment by an underwriter would be no more than 12.5% of the total loss suffered by the insured. Speaking afterwards on the sidelines, Minton said that it was important to realize that the 12.5% was just a hypothetical figure – the point to emphasize was that insurers were not just reinstating the liability that they previously had. Roderick, also speaking on the sidelines, said that the point of the relatively new inclusion clause was to encourage the insureds to undertake their inventory checks more diligently and with the required frequency. That way the average loss period should be reduced, because the insureds would be checking inventory levels more often and with more assiduousness.

Nick Derrick said that “it is not that we are looking to get out of paying claims. We just feel that they should inspect their inventory more often.”

 

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