Court of Appeal finding in Quadra v XL strengthens hand of insureds

The Court of Appeal has upheld the first instance ruling in Quadra Commodities’ action against several big-name insurers, in a decision that could have market-wide implications for cargo cover.

The ruling last month from Sir Julian Flaux, Lord Justice Popplewell and Lord Justice Snowden means respondents must indemnify Geneva-based trading house Quadra Commodities for misappropriation of grain following the collapse of Ukraine’s Agroinvest four year ago.

But more broadly, the outcome strengthens the hand of risk marine cargo policy buyers generally, by tightening the definition of “insurable interest” in their favour.

Reed Smith, which acted for the respondents, said in a note: “It is now clear an assured can have an insurable interest in unascertained goods, irrespective of whether they form part of an identified or an unidentified bulk, and regardless of whether the insured had acquired title to the goods or a proprietary interest in part of a bulk of commingled goods.”

An insurable interest in goods can include, inter alia, a right that arises from a contract relating to the goods, such as where a buyer has assumed risk in the goods under a sale contract.

It can also include payment or part-payment of the price for the goods, irrespective of whether they have have been ascertained, or are part of a sufficiently ascertained bulk.

Given the importance placed by the Court of Appeal on contemporaneous inspection reports, Reed Smith also emphasised the importance of good record keeping.

Jonathan Bruce, deputy head of the global insurance practice at law firm HFW, said Ukrainian law had given Quadra immediate right to possession of the grain, which the Court of Appeal held to constitute an insurable interest.

“The goods in bulk clearly existed and there was plenty of factual evidence to support that. I would not have recommended an appeal if I had been acting for the insurers,” he said.

“This makes life easier for cargo owners and commodity traders. This decision adds validity to the product, as it means insurers can’t get off the hook by simply saying ‘there was never any physical loss here, it’s just a paper loss’.”

However, it opens the possibility some insurers may find themselves having to pay out multiple indemnities on a single loss, with several parties claiming on the same cargo.

Some insurers may therefore respond with exclusions for misappropriation and/or include additional warranties, perhaps insisting on surveys to prove a cargo exists and is a demarcated entity.

That step would have real-world practical implications for the sale and purchase of some commodities.

It could not immediately be established whether the defendants – which include XL, Axa and Swiss Re – plan to take the matter to Supreme Court.

The original High Court decision also set a precedent for interpreting section 13a of the 2015 Insurance Act, which sets out a right to be paid insurance monies within reasonable time, which in practical terms amounts to 12 months.

This aspect of the case – which was also hailed as important across the entire insurance industry – did not form part of the appeal, which instead was instead mounted on the basis of the facts.

The legal fight arose after Quadra entered into a series of contracts to buy grain from Agroinvest, in late 2018 through to early 2019.

But Agroinvest was engaged in a Ponzi scheme-style fraud, obtaining grain from Ukrainian farmers and issuing warehouse receipts for the grain to multiple different buyers.

After Quadra received only two parcels of the grain it had paid for, it notified its insurers of a claim for monetary losses under an all-risks marine cargo policy.

The insurers refused to pay, on the grounds Quadra had no insurable interest. Quadra subsequently commenced legal proceedings.

To have an “insurable interest” under English law, an insured must have a legitimate economic or other interest in the subject matter insured.

This is designed both to distinguish insurance from gambling and to protect insurers from spurious claims.

The respondents argued in this instance, there had been no physical loss of grain. Indeed, the claimant could not prove the goods had even existed, given the existence of multiple warehouse receipts.

But the High Court ruled, on the balance of probabilities, grain corresponding to cargo descriptions was physically present in Agroinvest’s warehouses.

It affirmed where an insurance policy is issued to cover particular subject matter risk, the courts are reluctant to see a claim fail on grounds of lack of insurable interest.

It also held Quadra, which had the burden of proof, had established an insurable interest, because it had paid for the goods and had an immediate right to possession of those goods. That Quadra never held any proprietary interest in the grain was not decisive.

Quadra further claimed damages for late payment under section 13a of the act. This required Quadra to establish payment was not made within a reasonable time. If insurers could establish there were reason­able grounds to dispute the claim, there would be no breach of section 13a.

Leaving aside the matter of whether there were reasonable grounds for disputing this specific Quadra claim, the judge ruled it reasonable for insurers to investigate, evaluate and pay the claim within one year from notification.

This article first appeared in Lloyd’s List, a sister publication of Insurance Day